2Q23 normalised earnings beat expectations
- 2Q23 normalised earnings of US$17.6bn, was 4% above street estimates, supported by margin surprise in Google Services and Google Cloud
- Cloud operating margin improved to 5% in 2Q23 after achieving breakeven in 1Q23, still way behind its cloud competitors margin levels
- Street projects 9% y-o-y revenue growth in 3Q23F, to be driven by recovering ad segment and the fast growing cloud
2Q23 normalised earnings of US$17.6bn, was 4% above street estimates. Alphabet Inc (GOOGL) reported normalised earnings (excluding the increase of US$752m due to change in accounting estimate for useful life of server and network equipment) of US$17.6bn (+10% y-o-y) in 2Q23, was 4% above street projection of US$16.9bn. This was largely due to an EBIT margin surprise in Google Services and Google cloud segments. Google Services EBIT margin was 35.4% (vs street’s 34.8%) and Google cloud EBIT margin was 5% (vs street’s negative 1.8%). Cloud segment’s operating margins turned positive in 1Q23 to 3%, but is still way behind AWS and AZURE in terms of operating margins of 24% and 43% respectively on a higher revenue base. 2Q23 revenue of US$74.6bn (+7.1% y-o-y) was 2.5% above street estimates, supported by steady demand for its cloud service and a rebound in advertising. However, this is the fourth consecutive quarter of single digit growth due to the pullback in digital ad spending on weaker macro. Google cloud revenue rose by 28% y-o-y to US$8.0bn, maintaining roughly the same rate of growth in 1Q23. Meanwhile, MSFT’s Azure revenue grew 26% y-o-y in its June quarter (27% y-o-y in its March quarter). GOOGL’s ad revenue rose 3.3% y-o-y to US$58.1bn after a flat growth in 1Q23 which is a relief to investors as some of them were concerned that traditional search users will be moving to generative AI chatbots from OpenAI and MSFT.
Street forecasts a revenue of US$75.2bn (+9% y-o-y) for 3Q23F as the company does not provide guidance. The growth is attributed to recovery in google ad segment and also steady demand for Google Cloud. According to street estimates, Google advertising revenue is expected to record 6% y-o-y growth in 3Q23 to US$58bn, subsequent to recovery in 2Q23. Google cloud is expected to record a 26% y-o-y increase in revenue to US$8.7bn. According to GOOGL, AI companies are flocking to it’s cloud technology so they can run the compute-heavy projects that are only available in a few places. More than 70% of so-called unicorns in generative AI are Google Cloud customers. Meanwhile, at the GOOGLE I/O 2023 event held in May 2023, GOOGL unveiled its efforts to enhance its search engine by integrating Generative AI. This advancement, along with GOOGL’s vast shopping graph which has 35bn product listings with over 1.8bn listings updated every hour, is expected to facilitate the transition from offline to online spending and solidify search’s competitive position in the online ad ecosystem. GOOGL currently holds more than 92% of search market share as of Jun 2023.