After posting revenue growth of 28% for each of the first two quarters of 2023, Google Cloud last week reported its Q3 growth rate tumbled to 22%, with Alphabet CEO Sundar Pichai making the rather bizarre claim that the slide is due to customers just beginning to clamp down on cloud spending.
Pichai’s rationalization had me scratching my head because we started hearing that explanation a year ago as the uncertain global economy was causing business leaders to clamp down aggressively on spending, including on cloud investments.
Three months ago, right after Google Cloud reported Q2 growth of 28% to $8 billion, I wrote the following in an analysis called “Google Cloud Outshining AWS: Q2 Shows Why It’s #2 on Cloud Wars Top 10“:
“Q2 revenue of $8 billion, up 28%: This means that the moderating growth rates experienced by Google Cloud have leveled off — a market-demand result that AWS would dearly like to match. But if I’m right with my prediction of 14% AWS growth, then that means Google Cloud is growing twice as fast as AWS. Or course, AWS’s revenue is over 2.5X larger than Google Cloud’s, and that certainly needs to be considered — but the larger issue is that Google Cloud has continued to grow at a 28% clip for two straight quarters; can AWS do the same?”
During the Q&A portion of last week’s Q3 earnings call, a financial analyst asked Pichai to describe the factors behind the decelerating growth rate. Here’s Pichai’s reply.
“On cloud, maybe what I would say is, overall, we have definitely started seeing customers looking to optimize spend. We leaned into it to help customers, given some of the challenges they were facing, and so that was a factor,” Pichai said.
I’m sure Pichai would have preferred not to be asked about the big drop in the growth rate from Q1’s 28% and Q2’s 28% to Q3’s 22%, but it was a perfectly legitimate question overall and particularly in light of the fact that Microsoft last week said its cloud revenue growth accelerated from 21% to 24% from Q2 to Q3.
The whole “optimization” thing began about a year ago, and it was cited repeatedly by CEOs from many Cloud Wars Top 10 companies as the driving force behind the slowdown in cloud spending over the past 12 months. So for Pichai to say on Oct. 24, 2023, that “we have definitely started seeing customers looking to optimize spend” simply doesn’t match up with what he and other execs have been saying for the past year.
On the bright side for Google Cloud, Pichai noted that its Vertex AI development platform saw an extraordinary jump in customer demand over the past two quarters.
“From Q2 to Q3, the number of active generative AI projects on Vertex AI grew by 7X, including Highmark Health, which is creating more personalized member materials,” Pichai said in his opening remarks on the earnings call.
Alphabet CFO Ruth Porat, asked about the growth slowdown in cloud, said, “What we’re really excited about is the revenue growth does reflect healthy customer adoption across the portfolio, and that’s infrastructure, data analytics, it’s security.”
Porat also said that “GCP growth in the third quarter was above the growth rate for cloud overall, and we feel really good about the work that they’re doing there. And then, of course, in addition to that is all of the contribution from Google Workspace.”
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