Every business has its patterns, and so it is with Google and its hodgepodge of advertising and cloud computing. The funny bit is that even though Google is not an IT supplier that is constantly chasing transactional business – people buying stuff right now because they need it now – and has a very large portion of its business that is subscription-based and therefore regular or marketing campaigned that might has well be an annuity for the company, the first quarter is always harder for Google.
To be specific, since 2012, the overall Google business always shows a sequential revenue decline from the fourth quarter of one year to the first quarter of the next year. Operating income for the company often also takes a dive here, too, and sometimes goes down in other quarters, and we think that has to do with how much the company is investing on infrastructure more than any other factor.
The Google Cloud business also exhibits a similar this pattern, where the first quarter is the slowest one for sequential growth for any given year, and operating income is also usually weakest there unless there is something really big that hit the books.
It is against this backdrop of regularity of a Q1 softening in the overall Google and then the Google Cloud business that we want to point out that the Google Cloud business is softening a little more than we expect even as it is still growing and increasing its share of the overall Google kitty.
In the quarter ended in March, Google’s overall revenues rose by 12 percent year on year to $90.23 billion, which represented a 6.5 percent sequential dip. Operating income at the search and advertising giant and the number three cloud builder in the world, rose by 20.2 percent to $30.61 billion year on year, which was a 1.2 percent sequential decline. Thanks to a big jump in other income (largely from its investments with its enormous cash hoard) and despite increasing research, development, product, and administrative costs, Google was able to boost net income by a pretty amazing 46 percent to $34.54 billion in the quarter. Despite aggressive capital spending of $17.2 billion in the period, Google still ended the March quarter with $95.33 billion in the bank.
Rich or poor, it’s nice to be rich.
Given this and the company’s desire to keep pace with rivals Amazon Web Services and Microsoft Azure in cloud infrastructure in general and AI infrastructure in particular, Anat Ashkenazi, chief financial officer at the company, reiterated that Google still planned to spend around $75 billion in capital expenses in 2025. So $57.8 billion to go. . . . By the way, Google is buying so much stuff and depreciating it as prudently as it can to try to maintain profitability in its cloud business, but even Ashkenazi had to warn Wall Street that depreciation is going to be hitting the P&L statements a bit harder than in the past.
Turning to Google Cloud, revenues were up 28.1 percent year on year to $12.26 billion, which is only 2.6 percent growth sequentially. Google Cloud’s operating income was up by an amazing 2.4X to $2.18 billion, but only grew 4 percent sequentially. As you can see from the chart above, operating incomes for the cloud business are flattening out faster than its revenues are decelerating.
This may be a temporary condition and an effect of customers being very careful about their cloud spending or searching out the best bang for the buck, or Google being proactive on pricing to maintain customers who might be thinking of using other clouds. (As the old adage says: It is ten times harder to get a new customer as it is to make an existing one happy.)
Back in Q1 2018, which is the first quarter we have any detailed modeling on Google Cloud, the company’s cloud business brought in about $1.17 billion in revenues and lost $1.17 billion on top of that revenue. (Meaning, for every dollar Google Cloud got, it took two dollars to deliver the goods before taxing into account taxes, depreciation, and other stuff not relating to the cost of goods sold.) This was a terrible business, any way you want to look at it, at the time, and Google eventually learned to stop turning over its inventory so fast to make the cloud business profitable.
Back in early 2018, Google Cloud represented a mere 3.7 percent of revenues and was a drain on profits. Move ahead seven years, and in Q1 2025 Google Cloud is 13.6 percent of the Google conglomerate’s overall business and is now 7.1 percent of its operating income. This is a feat of accounting as much as it is technology and marketing, but Google did it and has become a credible cloud provide at a scale that makes it more likely to grow its business.
Still, those flattening curves above. . . . It is unclear what they mean. Perhaps cloud spending is a leading indicator for recessions, as server spending often has been in the past. We will be watching Amazon’s and Microsoft’s financials later today like a hawk to see. Operating income at the clouds might be a better indicator than revenue.
Anyway, some of that flattening in the operating income line is due to depreciation, which was $3.41 billion in the year ago quarter, and grew by 31.5 percent to $4.49 billion in Q1 2025. And it will grow as older gear gets written off to make way for the new. Eventually, every dollar that Google spends on capital equipment has to drain back out of the balance sheet. But, this is true of all of the hyperscalers and cloud builders, and indeed any company that makes big capital expense investments. Google is no exception in this regard, and if its deprecation is faster and harder, it would be interesting to know why.
Our guess? Older AI investments and older CPU investments don’t translate well to modern workloads, and and AI models have been changing so fast that it is hard to see why older GPUs and TPUs are worth the space they take up and the power and cooling they use doing new work when newer machines can do it so much better.
Google says its cloud business is growing faster than the industry at large, and this certainly has been true. We will know more once AWS and Microsoft report to Wall Street.