Wednesday, October 4

Google’s Search For Non-ad Revenue Puts Spotlight on Cloud & Pixel

Alphabet’s non-advertising business, which houses its cloud unit, Pixel smartphones and the Play store, has long been sandwiched between Google’s advertising juggernaut and its moonshot ventures that have captured popular imagination.

Not any more.

The business, categorized as “Other Revenue” in its earnings report, posted a 49.4% jump in revenue to $3.10 billion on Thursday – a sum already bigger than Twitter’s annual revenue.

The business now represents about 13% of Alphabet’s total revenue, compared with 10% a year earlier. That may not be a big jump but definitely shines a light on Google’s efforts to cut down its dependence on revenue from advertising, where it competes with Facebook.

“(Google) is doing a good job, a much better job in diversifying revenue than Facebook is,” said analyst James Wang of ARK Investment Management. “We think that is quite an impressive achievement.”

Alphabet does not break out revenue contribution within the “Other Revenue” segment. But analysts have said that cloud is the most prominent among the category’s clutch of businesses.

To be sure, Google’s cloud venture is still much smaller than market leader’s Amazon Web Services and Microsoft’s Azure.

But Google is investing heavily. “In Q1, our largest growth in headcount and capital expenditure was in cloud,” Google Chief Executive Sundar Pichai said on a call with analysts on Thursday.

Amazon’s cloud business grew 43% to $3.66 billion in the first quarter. Microsoft’s cloud unit grew 93%.

“We believe Google will continue to gain traction in the cloud market, and when combined with Google Play and sales of Google’s hardware products, we see Google’s ‘other’ revenue growing 38% to nearly $14 billion in 2017,” Morningstar analyst Ali Mogharabi wrote in a client note.

The company’s hardware business also started gaining traction after Google released a pair of high-profile hardware products last year – the Pixel phone and the Google Home, a smart speaker like Amazon’s Echo.

“People are hankering for a really awesome Android phone that basically gives them the iPhone experience,” Wang said, adding that the growth in Google’s “other revenue” bucket this quarter “shows sustained momentum for the Pixel.”

Still, the lion’s share of Alphabet’s revenue comes from ads and that’s not going to change any time soon. Total advertising revenue increased 18.8% to $21.1 billion in the first quarter, the company reported on Thursday.

Profit also rose 29% to $5.43 billion, beating Wall Street estimates. At least 10 brokerages raised their price targets on the stock after the earnings report.

Alphabet’s drive for diversification also includes its “Other Bets” business, considered the company’s loss-making arm. The business, home to the Waymo self-driving car, Google Fiber and thermostat-maker Nest, posted a first-quarter loss of $855 million.