Alphabet Inc. (GOOGL, Financial) (GOOG, Financial) announced its earnings for the first quarter of 2024 on April 25. Both revenue and net income exceeded the relatively modest market expectations. In CEO Sundar Pichai‘s words, “Our results in the first quarter reflect strong performance from Search, YouTube and Cloud. We are well under way with our Gemini era and there's great momentum across the company. Our leadership in AI research and infrastructure, and our global product footprint, position us well for the next wave of AI innovation.”
Pichai expressed his confidence in Alphabet's ability to continue to grow its core business and leverage its technology leadership in the artificial intelligence race. Along with the earnings release, the company also announced its first quarterly dividend of 20 cents per share as well as a new $70 billion authorization in share repurchases. Obviously investors cheered the results as Alphabet's market cap has reached all-time highs again.
First-quarter highlights
Alphabet's first-quarter revenue grew 15% to $80.50 billion, exceeding the market's expectation of $79 billion. Adjusted operating income grew 31% year over year to $26.20 billion and the adjusted operating margin was 33%, a considerable improvement from 29% in the prior-year quarter.
On a segment basis, both Google Services and Google Cloud saw strong revenue growth. Google Services segment revenue grew 14% year over year to $70.4 billion. Within the Google Service segment, Google Search and other advertising revenue grew 14%, subscription, platform and devices revenue grew 18% and YouTube advertising revenue grew 21%. The only negative impact of the Google Services segment was network advertising, which was down 1%. The Google Services segment's operating income grew 28% year over year and the operating margin was 40%.
Google Cloud business also experienced very robust growth. Segment revenue for Google Cloud grew 28% to $9.60 billion for the quarter. Segment operating income was $900 million and segment operating margin was 9%. During the earnings call, President and Chief Financial Officer Ruth Porat explained that the growth in the Google Cloud business reflected “significant growth in GCP with an increasing contribution from AI and strong Google Workspace growth, primarily driven by increases in average revenue per seat.”
The most impressive part of Alphabet's first-quarter results is that the company achieved very high-quality revenue growth as its gross margin expanded to 58.14%. The last time Alphabet's gross margin surpassed 58% was in the third quarter of 2017 when its gross margin reached almost 60%. Alphabet's operating margin of 31.60% is also very high on a historical basis. This is the highest operating margin for the company since the fourth quarter of 2012.
Riding the AI wave
Like all big tech companies, Alphabet also bets heavily on AI. During the earnings call, Pichai laid out Alphabet's leadership in six areas when it comes to the technology: “research leadership, infrastructure leadership, innovation in Search, global product footprint, velocity in execution, and monetization paths.”
He also said that that Gemini 1.5 Pro“includes a breakthrough in long context understanding, achieving the longest context window of any large-scale foundation model yet."
"Combining this with Gemini's native multimodal understanding across audio, video, text code and more, it's highly capable," he added. "We are already seeing developers and enterprise customers enthusiastically embrace Gemini 1.5 and use it for a wide range of things. Beyond Gemini, we have built other useful models, including our Gemma open models as well as image and visual models and others.”
Of the six areas that Pichai claims Alphabet has leadership, I am convinced the company is indeed a leader in research, infrastructure, innovation and global product footprint. After all, it did pioneer many of the modern breakthroughs that power the AI technology. According to Chatbot Arena, Alphabet's Gemini 1.5 Pro's ranking is tied at second.
I am less convinced, though, that Alphabet can lead the AI race in terms of velocity in execution and monetization paths because, historically, speed of execution and monetization has not been its strength. But that may change as Pichai's leadership has set the tone for a company-wide effort to address complacency and sloth, both of which had been hindering Alphabet's speed of execution.
Cost re-engineering program paying off
In a previous discussion regarding Alphabet's culture, I laid out the challenges the company was facing when it comes to employees' complacency and sloth. At the end of the piece, I wrote:
“Fortunately, Sundar Pichai has realized the culture issues and has taken steps to address them. It remains to be seen whether he can successfully tackle them in the future.”
Alphabet's recent actions are encouraging signs that the management team has been very effective in its cost re-engineering efforts. Investors can feel the sense of urgency from the management team. For the first quarter, the number of global employees decreased by 5.10% year over year to approximately 181,000. It is expected that layoffs will continue in the second quarter.
Further, on May 1, CNBC reported, “Google is laying off at least 200 employees from its ‘Core' organization, which includes key teams and engineering talent, in a reorganization that will include moving some roles to India and Mexico.” This is another sign that Alphabet's management team is determined to further improve efficiency while maintaining its technology leadership.
I applaud Alphabet's management team for their sense of urgency and determination in terms of tackling its most daunting issues. They are making difficult decisions that may not be popular in the short term, but are crucial for the company's long-term future.
Conclusion
Alphabet's first-quarter results handily beat investors' low expectations. But more importantly, the management team has showed investors they are determined to achieve high-quality growth. It is very encouraging to witness the steps they are taking to address its culture issues. While the journey ahead may be challenging, if the transformation is successful, Alphabet is likely to emerge stronger and more competitive in the long run.
