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Google Cloud reports $1bn operating loss, but Alphabet remains committed

Company has extended the life of its servers from three to four years, netting $625m more revenue

Alphabet, the parent company of Google, has reported a 34% jump in revenue to $55.3bn for the quarter ending 31 March 2021.

Sundar Pichai, CEO of Google and Alphabet, said: “Over the last year, people have turned to Google Search and many online services to stay informed, connected and entertained. We’ve continued our focus on delivering trusted services to help people around the world. Our cloud services are helping businesses, big and small, accelerate their digital transformations.”

The company’s Google Cloud segment, which includes GCP and Google Workspace, reported revenues of $4bn for the quarter, up 46%, but it reported an operating loss of $1bn.

Ruth Porat, CFO of Google and Alphabet, said: “We’re very pleased with the ongoing momentum in Google Cloud, with revenues of $4bn in the quarter, reflecting strength and opportunity in both GCP and Workspace.”

In January 2021, the company completed an assessment of the useful lives of its servers and network equipment. As a result, it said it had now adjusted the estimated useful life of the servers in Google’s datacentres from three to four years and the estimated useful life of certain network equipment from three to five years. For the three months ending 31 March 2021, this change has led to a reduction in depreciation expense of $835m and an increase in net income of $650m, said Alphabet.

In a transcript of the earnings call, posted to the Seeking Alpha financial blogging site, Porat emphasised Google’s commitment to its cloud business in spite of the operating loss and said the approach to building the business has not changed. “We remain focused on revenue growth and we will continue to invest aggressively in products and our go-to-market organisation, given the opportunity we see,” she said.

“The operating results in Q1, in part, reflect some notable items in the quarter. First, the lapping of the unusually high allowances for credit losses recorded in the first quarter of 2020. And second, lower depreciation expense due to the change in the estimated useful lives, although the dollar benefit will diminish throughout the course of the year across segments.

“As we have noted previously, operating results should benefit from increased scale over time. However, at this point, we do remain focused on continuing to invest to build the cloud organisation for long-term performance.”

Nick McQuire, chief of enterprise research at CCS Insight, said: “The bottom-line picture is improving for Google Cloud, largely due to the investment the company is making in hiring senior industry expertise. This is a cog in part of its larger strategy to secure large-scale enterprise deals.

“What we’re seeing emerge is some real differentiation for Google Cloud’s business, particularly in areas such as industry vertical go-to-market and – above all – data transformation, analytics and machine learning. 

“Where Google Cloud has real credibility is with companies looking to transform their business models with higher-level cloud services. While it’s still a challenger in the market, opportunities abound for Google Cloud to gain market share and push ahead of other competitors – it’s all to play for today.”

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