Google AI starts to deliver profits

Author: Zhang Yifan

Editor: Shen Siqi

Source: Hard AI

Overall, in 2024Q2, Google's revenue and profit were slightly higher than analysts' consensus expectations. This quarter, Google —

1) Cloud Business Hits Record High: Driven by AI, cloud business revenue surpassed $10 billion for the first time, with operating profit exceeding $1 billion;

2) AI Empowers Advertising Business Significantly: In Q2, Google announced over 30 new AI-powered products, leading to a 15% average profit increase for advertisers and attracting more advertisers. Search business revenue in the second quarter was $48.5 billion, a 14% year-on-year increase; YouTube ad revenue was $8.7 billion, a 13% year-on-year increase;

3) Capital Expenditure (AI Infrastructure Construction): The company's capital expenditure in the second quarter reached $13 billion, mainly used for AI infrastructure construction. The company expects capital expenditures for each quarter of the year to remain roughly at or above the Q1 level of $12 billion. Faced with the issue of overinvestment, the company stated that the risk of "underinvestment" in AI is far greater than the risk of "overinvestment";

4) YouTube Ad Business Below Expectations: YouTube ad revenue was $8.7 billion, a 13% year-on-year increase and a 7% increase from the previous quarter. Although the year-on-year and quarter-on-quarter growth is significant, the market had higher expectations for YouTube post AI-empowerment ($9 billion), leading to slightly lower-than-expected performance. Additionally, data shows a slight decline in YouTube usage in Q2;

5) Operating Profit Margin Rises Again: Through restructuring, personnel optimization, and slowing down recruitment, the number of employees decreased by 2,216 this quarter, leading to another reduction in operating costs.

6) Dividend Announcement Again: Following the unprecedented dividend plan introduced last quarter, a dividend of $0.20 per share was announced again this quarter;

I. Financial Situation of Google in 2024Q2

1. Revenue was $84.7 billion, a 13.54% year-on-year increase, exceeding the consensus expectation of $84.3 billion;

2. Net profit was $23.6 billion, a 28.6% year-on-year increase, surpassing analysts' expectation of $23 billion;

Regarding dividends and buybacks, the plan from the previous quarter was continued. A cash dividend of $0.20 per share was announced, and the amount of stock repurchased in the second quarter was $15.684 billion

2. Google's Revenue by Business Segment in 2024Q2

The main advertising and cloud businesses achieved significant year-on-year and quarter-on-quarter growth, with cloud business reaching a new high, but YouTube advertising business slightly below expectations.

1) Google Services revenue was $73.9 billion, an 11.5% year-on-year increase. Specifically,

- Google Search and other revenue was $48.5 billion, up 14% year-on-year and 5% quarter-on-quarter;

- YouTube advertising revenue was $8.7 billion, up 13% year-on-year and 7% quarter-on-quarter;

- Network advertising revenue was $7.4 billion, down 6% year-on-year and flat quarter-on-quarter;

- Subscription, platform, and device revenue was $9.3 billion, up 15% year-on-year and 6.9% quarter-on-quarter;

2) Google Cloud revenue was $10.3 billion, up 28% year-on-year and 7.3% quarter-on-quarter. The cloud business performed strongly, surpassing $10 billion in revenue for the first time in a quarter, reaching $10.347 billion; achieving over $1 billion in quarterly operating profit for the first time, at $1.172 billion.

3) Other Bets revenue was $365 million, up 28.1% year-on-year and down 27% quarter-on-quarter.

3. Google Earnings Call for 2024Q2

1. Cloud Business Reaches New High: Quarterly revenue exceeded the $10 billion mark for the first time, reaching $10.347 billion, a 29% year-on-year increase and 7.3% quarter-on-quarter growth. Additionally, the cloud business achieved over $1 billion in quarterly operating profit for the first time, reaching $1.172 billion. Growth was mainly driven by AI, with AI infrastructure and generative AI solutions contributing billions of dollars in revenue to the cloud business (year-to-date) and being used by over 2 million developers.

2. Operating Margin Improvement: The operating margin improved compared to the previous quarter, mainly due to the company slowing down its hiring pace and reducing costs through restructuring and personnel optimization. Legal-related expenses decreased this quarter, further reducing administrative expenses. The company plans to expand Alphabet's operating margin in 2024 relative to 2023.

3. Capital Expenditure Growth: Capital expenditure for 2024Q2 was $13 billion, mainly used for technology infrastructure investments, with the largest portion going to servers, followed by data centers. The company expects capital expenditures for each quarter to roughly remain at or above the Q1 level of $12 billion. In Q2 2024, Google announced the establishment of its first data center and cloud region in Malaysia, as well as expansion projects in Iowa, Virginia, and Ohio.

4. Diversified Cloud Platform: The latest NVIDIA Blackwell platform will enter Google Cloud in early 2025. Additionally, Google has expanded support for third-party models, including Anthropic's Cloud 3.5 Sonnet and open-source models like Gemma 2 Lama and Mistral.

5. AI Empowered Advertising Business: In 24Q2, Google announced over 30 new AI-powered products, resulting in an average 15% increase in profits for advertisers. The company is also testing virtual try-on and shopping ads, with plans for a wide rollout later this year. Feedback shows that this feature generates 60% more high-quality views than other images and leads to higher click-through rates to retail websites. Retailers appreciate it as it drives purchase decisions and reduces returns.

6. Subscription Business Growth: Subscription business growth is mainly driven by the increase in revenue from YouTube (YouTube TV and YouTube Music Premium). However, the growth rate has slowed down due to the impact of the price increase of YouTube TV in the second quarter of last year.

7. Growth in Search Business: Mainly benefited from the strong performance in the retail industry, followed by the financial services industry.

8. Cybersecurity: The company reiterated the importance of cybersecurity but did not respond to the market rumors about the "USD 2.3 billion acquisition of cybersecurity startup Wiz."

9. Litigation Related: Last year, Google was fined USD 62 million for privacy violations, resulting in significant one-time expenses. Currently, due to extensive restructuring and personnel optimization, analysts expect one-time expenses such as severance pay. Additionally, Google's antitrust investigation is ongoing, and if found guilty, it could lead to a decrease in revenue, market share, and incurring legal expenses as one-time costs.

10. New CFO: The new CFO, Anat Ashkenazi, will take office on July 31st. She is expected to make her first appearance at the next quarter's earnings conference call. The former CFO, Ruth Porat, will not completely leave the company and will take on a new role within the company.

11. Waymo's Performance: In June, Waymo removed the waitlist in San Francisco, allowing anyone to ride. So far, Waymo has performed well, providing over 2 million rides and driving over 20 million miles of fully autonomous driving on public roads. Waymo now offers over 50,000 paid public ride services per week, mainly in the San Francisco and Phoenix areas.

IV. Google 2024Q2 Performance Analysis

1) Search Business: The search business continues to show strong growth, with revenue of USD 48.5 billion, a year-on-year increase of 14% and a quarter-on-quarter increase of 5%. The growth is mainly driven by the growth in the retail industry, followed by the financial services industry.

The main reasons for the growth are Google's continuous application of AI technology in its search engine, attracting more users and advertisers. In 24Q2, Google announced over 30 new AI-powered products, resulting in an average 15% increase in profits for advertisers.

Moreover, according to Statcounter data, Google's market share in the search engine is not significantly affected by competitors (such as Bing, ChatGPT). Bank of America also mentioned in its July report that as of June, emerging AI websites (such as Perplexity, Claude.ai, etc., The daily total traffic without ChatGPT is less than 0.3% of Google's daily traffic.

2) Youtube Advertising Business: Revenue of $8.7 billion, a year-on-year increase of 13% and a quarter-on-quarter increase of 7%; although the Youtube advertising business has seen significant year-on-year and quarter-on-quarter growth, it still slightly missed market expectations due to high market expectations.

The growth is mainly driven by brand promotion, followed by direct response advertising. Additionally, the strong performance of Shorts also contributed to a 13% year-on-year growth in YouTube advertising revenue. In the fourth quarter of last year, Google introduced advertising on YouTube Shorts, and since then the monetization rate of Shorts has steadily increased, especially in the U.S. market. Furthermore, the viewing time of shopping-related videos increased by 25% year-on-year, highlighting YouTube's investment potential in e-commerce.

Despite the year-on-year growth in Youtube advertising business, data shows that Youtube's usage in the second quarter slightly decreased compared to the previous quarter.

3) Cloud Business: The cloud business performed strongly, with quarterly revenue exceeding $10 billion for the first time, reaching $10.347 billion, a year-on-year increase of 29% and a quarter-on-quarter increase of 7.3%. At the same time, the cloud business achieved quarterly operating profit exceeding $1 billion for the first time, reaching $1.172 billion.

Mainly driven by AI growth. Since the beginning of the year, AI infrastructure and generative AI solutions have contributed billions of dollars in revenue to Cloud, with over 2 million developers using these AI solutions. Currently, most of Google's top 100 customers are already using Google's generative AI solutions.

4) Operating Profit Margin: The operating profit margin has once again increased to 32%.

The main reasons for the increase are: 1) the company has slowed down its hiring pace; 2) through restructuring and personnel optimization, the number of employees decreased by 2,216 this quarter; 3) legal-related expenses have decreased, reducing management costs The third quarter is expected to see a slight increase in staff, mainly due to the addition of new graduates. The company plans to expand its operating profit margin for the full year of 2024 compared to 2023.

5) Capital Expenditure: Capital expenditure has once again increased to $13.2 billion, a 10% increase from the previous period.

The continuous growth in capital expenditure is mainly due to the construction of AI infrastructure. The company revealed that capital expenditure is mainly used for technology infrastructure investment, with the largest portion being servers, followed by data centers. The company expects quarterly capital expenditure to remain roughly at or above the Q1 level of $12 billion for the full year.

Additionally, the company's traffic costs have also slightly increased compared to the previous quarter.