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Google Cloud, the cloud computing arm of Alphabet, has turned profitable at an operating level for the first time ever, despite fears of macroeconomic uncertainty.  

Google Cloud posted an operating income of $191 million for the quarter ended March, compared with an operating loss of $706 million for the corresponding period last year.

The unit’s revenue grew 28% to $7.45 billion during the quarter, resulting in an operating margin of 2.6%.

“We have consistently grown top line revenue and improved annual operating margin, and we continue to do so this quarter. Our growth has come from our deep relationships with large enterprises, a strong partner ecosystem, and our product leadership,” Alphabet CEO Sundar Pichai said during an earnings call.

“Over the past 3 years, GCP’s annual deal volume has grown nearly 500%, with large deals over $250 million growing more than 300%. Nearly 60% of the world’s 1,000 largest companies are Google Cloud customers, and many leading startups and millions of small and medium enterprises use Google Cloud,” Pichai said.

Google Cloud’s mounting losses for the past few years could be attributed to the continued investments, especially in data centers. The company has been making these investments to compete better with larger rivals Amazon Web Services and Microsoft Azure.

In March, Google Cloud announced plans to open a second Middle Eastern region in Qatar. In October last year, Google announced it would open new regions across Austria, Greece, Norway, South Africa, and Sweden to supplement new regions announced in August for New Zealand, Malaysia, Thailand, and Mexico.

Reduced customer expenditure slowing revenue growth

Alphabet’s cloud computing arm continues to see a slowdown in revenue growth over the past few quarters.

For the March quarter, revenue growth for the unit came in at 28% year-on-year, four percentage points slower than the December quarter, which saw 32% year-on-year growth. The previous sequential quarter that ended in September registered an ever stronger growth of 38% year-on-year.

“In Q1, we continued to see slower growth of consumption as customers optimized GCP costs reflecting the macro backdrop, which remains uncertain,” Alphabet Chief Financial Officer Ruth Porat said during the earnings call.

The company, according to CEO Pichai, has been trying to help enterprise customers optimize their spending during this period of uncertainty.

“I would add, that we are leaning into optimization. I mean there is an important moment to help our customers, and we take a long-term view. And so, it’s definitely an area we are leaning in and trying to help customers make progress in their efficiencies where we can,” Pichai said during the call.

Google Cloud is growing much faster than its parent Alphabet. For the March quarter, Alphabet posted total revenue of $69.78 billion with Search continuing to be the largest contributor with a $40.35 billion share. Revenue for the entire company was up only 3% year-on-year.

Alphabet, which laid off 12,000 employees in the beginning of the year, said it will continue to hire top engineering and technical talent while investing in areas of priority.

Cloud Computing, Google

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IBM reported net income  of $2.9 billion in the fourth quarter of 2022 and year-on-year increases in revenue across all three of its business segments.

That’s an increase in net income of 9% compared to the total reported for the corresponding quarter of 2021, or 17% comparing only continuing operations: IBM spun off most its infrastructure management division as a new business, Kyndryl, in November 2021, and sold some assets of its Watson Health business in January 2022.

On a conference call with analysts to discuss the results, CFO Jim Kavanaugh alluded vaguely to this leaving IBM with some stranded costs in its business, saying, “We expect to address these remaining stranded costs early in the year and anticipate a charge of about $300 million in the first quarter.”

Later that day, in an interview with Bloomberg, Kavanaugh explained that eliminating those stranded costs — staff left with nothing to do following the asset disposals —  would result in IBM cutting about 3,900 jobs, or 1.5% of its workforce. An IBM representative said the company had “nothing further to add.”

IBM CEO Arvind Krishna said on the call with analysts that the company’s fourth quarter and full year results demonstrate the successful execution of its hybrid cloud and AI strategy.

He noted that IBM was continuing to invest in large language and foundation models — the technologies behind tools like ChatGPT — and is infusing these capabilities across the company’s AI portfolio. In addition, Krishna said that business with strategic partners, including SAP, Microsoft and AWS, had generated over $1 billion in revenue for the year.

“I’m confident in our ability to leverage hybrid cloud and AI to help clients turn business challenges into opportunities,” he said.

Growth across all lines of business

Krishna told analysts that IBM had delivered strong revenue growth across its business, with results “broad-based” across its software, consulting, and infrastructure segments as well as across geographies.

Software sales for the fourth quarter rose 2.8% from a year earlier, to $7.3 billion, while infrastructure sales rose 1.6% to of $4.5B.

Consulting revenue also grew, but by just 0.5%, to $4.8 billion. If it continues at that rate, it will fall behind the market: Gartner forecast that global spending on consulting will grow 6.7% this year to $264.9 billion.

IBM’s software segment was boosted by sales of its hybrid platform and solutions, up 5%, while automation, data and AI, and security all contributed growth of 4%; transaction processing revenue was down by 3%. Revenue generated by Red Hat accounted for the biggest area of growth in this segment, up 10% from a year earlier.

The biggest driver in the infrastructure segment was the zSystems line of mainframe computers, up 16% after the z16 model became generally available in May. However, distributed infrastructure revenue remained flat and infrastructure support was down by 8% year on year.

Kavanaugh said on the conference call that he hopes to squeeze another $200 million profit from the infrastructure segment in 2023 by extending the period over which it amortizes the cost of its IT assets. “Due to advances in technology, we are making an accounting change to extend the useful life of our server and networking equipment,” he said. “Given this is a change to the depreciation, there’s no benefit to cash.”

IT Consulting Services, Multi Cloud

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SAP’s revenue rose 11% in 2022 with the cloud component of that climbing 33%, but net income dropped 68%, prompting restructuring and layoffs in its CRM activities.

The company is also exploring selling its majority stake in Qualtrics, the experience management platform it bought for $8 billion in 2018, to refocus on its core business.

SAP already sold a minority stake in Qualtrics in an IPO in early 2021 and CEO Christian Klein (pictured) said he expected to continue to partner with Qualtrics going forward, but the sale would allow SAP to reinvest in other areas of its business.

The layoffs — affecting around 2,800 staff, or 2.5% of SAP’s global workforce — are part of “a targeted restructuring,” Klein said. “It’s not performance-based.”

That’s in contrast to companies such as Google or Salesforce, which have announced across-the-board layoffs based on performance review criteria to reverse over-hiring during the pandemic period.

“We definitely didn’t over-hire,” Klein said, noting that revenue grew faster than SAP employee growth in 2022.”

SAP’s overall revenue for 2022 totaled €30.9 billion (US$33 billion as of Dec. 31, 2022), up 11% year on year. Growth in Q4 was slower, however, up 6% to €8.4 billion.

With the restructuring, SAP seems set to abandon the idea of delivering CRM as a stand-alone product, focusing instead on investing in tightly integrated industry-specific solutions in markets where it has a strong foothold with its core ERP products. The layoffs — the first the company has announced since 2019 — will be slower to take effect than at Microsoft or Oracle since a greater proportion of SAP’s staff are in Europe, where legislation to protect workers means hiring and firing takes longer.

Up in the cloud

Cloud revenue for the year rose sharply, up 33% to €12.6 billion, and now accounts for 40% of all revenue. €2.1 billion of that is from S/4HANA, up 91% year on year.

“SAP is now a true cloud company,” Klein said, adding that the company already has a backlog of €12 billion in contractually committed cloud revenue it expects to recognize in 2023, and a total cloud backlog of €34 billion including commitments for future years.

Net income for 2022, though, fell 68% to €1.7 billion, with the decline accelerating in Q4 to 77% year on year.

Klein attributed some €410 million of that decline to SAP’s decision to wind down its business in Russia and Belarus following Russia’s invasion of Ukraine.

Inflation was another factor affecting profit, he said. Although SAP increased prices by around 3% mid-year, this wasn’t enough to offset the increased costs the company faced, he said.

For the year ahead, SAP forecast cloud revenue will continue to grow at between 22 and 25% at constant currencies, with a longer-term ambition of passing €22 billion in cloud revenue and €36 billion in total revenue by 2025.

SAP also sees its share of more predictable revenue (cloud and software support revenue as a percentage of total revenue) rising from 79% in 2022 to 83% in 2023, and 85% by 2025, Klein said.

No extension for ECC

One thing that definitely won’t grow in 2023 is how much time users of SAP’s legacy ECC 6.0 and Business Suite 7 ERP applications have left to migrate to something more modern.

SAP announced in 2020 it will only provide mainstream maintenance for its legacy software until the end of 2027, with extended maintenance available for an additional fee until the end of 2030.

“We will not extend [the deadline],” Klein said. “Customers are asking us to put a lot of R&D dollars into new innovations […] and for us it is very important we convince our customers to move with us, with value and good business cases.”

Although the company is now focused on the cloud with the new generation of its core ERP application, S/4HANA, customers can choose where they run it. “SAP is the only software vendor in the ERP space that still gives a commitment for on-premises until 2040. That also costs us money,” Klein said.

An eye on AI

SAP will continue to invest in developing artificial intelligence (AI) as part of its products, Klein said, including in areas such as predictive maintenance.

It’s also experimenting with the new wave of generative AI tools such as OpenAI’s ChatGPT to see how they can augment its operations internally.

Other companies are considering using ChatGPT for tasks including coding, with the AI taking on one of the roles in a pair-programming team, report writing, or targeted marketing.

Klein is wary of giving ChatGPT too much freedom, but sees potential for it in automating responses to common support requests or in translating documentation and user interfaces. “I don’t believe such technology can code a new logistics app by itself,” he said. On the other hand: “We get millions of tickets about how-to questions, and we are definitely going to see that AI is able to automate a lot and drive efficiency,” he added. SAP translates its software into over 100 languages, and is looking at using AI to accelerate the translation process, he said.

Artificial Intelligence, Cloud Computing, SAP, Staff Management