GPT is not to be feared! Alphabet-C's search revenue accelerated in the second quarter, and cloud business unexpectedly did not slow down. After hours, it briefly rose more than 7%.

The impact of AI tools like ChatGPT has not shaken the position of Alphabet-C, the leader in search. Alphabet-C's cash cow search business regained momentum in the first quarter and accelerated growth, reversing the continuous decline in advertising revenue over the past six months. The future growth engine, cloud business, is even stronger than Wall Street expected.

After the release of the second-quarter earnings report, Alphabet-C's parent company, Alphabet-C-C-C-C-C-C-C-C-C, saw a slight increase of nearly 0.6% in its stock price on Tuesday, followed by a sharp rise after hours, with an increase of more than 7% at one point.

Second-quarter revenue growth far exceeds expectations, EPS profit reverses year-long decline

After the U.S. stock market closed on Tuesday, July 25, Alphabet-C-C-C-C-C-C-C-C-C announced that in the second quarter of this year, both revenue and earnings per share (EPS) continued to exceed Wall Street expectations. Moreover, EPS reversed its downward trend for four consecutive quarters and increased by double digits compared to the same period last year.

• In the second quarter, revenue reached $74.604 billion, a year-on-year increase of 7%. Although it is far from the double-digit growth during the COVID-19 pandemic, it is more than twice the 3% growth in the first quarter. Analysts expected a year-on-year growth of 4.4% to $72.77 billion.
• Diluted EPS for the second quarter was $1.44, a year-on-year increase of 19%. Analysts expected a year-on-year increase of about 9.1% to $1.32, while it decreased by approximately 4.9% in the first quarter.
• Operating profit for the second quarter was $21.838 billion, a year-on-year increase of nearly 12.3%. Analysts expected a year-on-year increase of 2.6% to $19.96 billion, while it decreased by 13.3% in the first quarter.

Alphabet-C's advertising revenue reverses two consecutive quarters of decline, exceeding expectations with 3.3% growth, and search advertising revenue accelerates to 4.8%

Looking at the business segments, Alphabet-C-C-C-C-C-C-C-C-C's most important departments, including Alphabet-C advertising, search, maps, YouTube, hardware, Android, Alphabet-C, and Google Play, continue to outperform expectations.

In the second quarter, Alphabet-C's total service revenue was $66.285 billion, a year-on-year increase of approximately 5.5%, lower than the approximately 8% growth in the first quarter but higher than analysts' expected year-on-year growth of 2.9%. Analysts expected revenue of $64.67 billion.

Within Alphabet-C's services, advertising revenue, which had declined for two consecutive quarters, returned to growth. In the second quarter, it recorded revenue of $58.143 billion, a year-on-year increase of 3.3%. Analysts expected a year-on-year increase of about 2.1% to $57.45 billion. Alphabet-C's advertising revenue, including search and other related businesses, reached $42.628 billion, with a YoY growth of approximately 4.8%. After returning to growth in the first quarter of this year, it accelerated further. The YoY growth in the first quarter was 1.9%.

In the second quarter, YouTube's advertising revenue from video platforms reached $7.665 billion, with a YoY growth of 4.4%. Analysts expect a YoY growth of nearly 1% to $7.41 billion.

Alphabet-C's cloud revenue slows down for two consecutive quarters, with a YoY growth of 28% and two consecutive profitable quarters

Including services provided to enterprise customers such as infrastructure and data analysis platforms, collaboration tools, etc., Alphabet-C's cloud business, which is considered the next growth engine, has maintained a high growth rate of nearly 30% and has not slowed down as expected by Wall Street.

In the second quarter, Alphabet-C's cloud revenue reached $8.031 billion, with a YoY growth of approximately 28%, maintaining the growth rate of the first quarter and stopping the trend of slowing growth for two consecutive quarters. Analysts expect a YoY growth of nearly 24.8% to $7.83 billion in the second quarter.

In the first quarter of this year, Alphabet-C's cloud business achieved profitability for the first time, and it continued to be profitable in the second quarter. The operating profit of the cloud business for the quarter was $395 million, which is about twice the profit of $191 million in the first quarter. In the second quarter of last year, the cloud business had a loss of $590 million.

CFO to Assume the Role of CIO, Responsible for Investments in AI and Other Technological Innovations

Alphabet-C also announced a senior management change: starting from September 1st this year, Ruth Porat, the CFO of Alphabet-C and Alphabet-C-C-C-C-C-C-C-C-C, will assume the role of President and Chief Investment Officer (CIO) of both companies while continuing to serve as CFO. At the same time, the company will search for a new CFO to take over her responsibilities.

After assuming the role of President and CIO, Porat will continue to report directly to Sundar Pichai, the CEO of the company. She will be responsible for investments in autonomous driving, AI, and other technological innovation departments, as well as the company's investments in various countries and communities worldwide. She will also focus on cooperation with decision-makers and regulatory agencies in various countries in terms of employment, economic opportunities, competitiveness, and infrastructure expansion. In the second quarter, the revenue from other bets was $285 million, a year-on-year increase of approximately 47.7%, higher than the analyst's expected $231.7 million. The operating loss for this business in the second quarter was $813 million, a year-on-year narrowing of 39.3%.

Capital expenditure in the second quarter was much lower than expected, CEO says continuous leadership in the AI field drives search evolution

At Google I/O 2023, the annual developer conference held in May this year, Alphabet-C unveiled a series of latest achievements in the AI field, including PaLM 2, a large language model comparable to GPT-4, which can run on mobile phones. An upgraded version of the ChatGPT robot Bard, powered by PaLM 2, was also introduced. Alphabet-C's cloud, search, email, and other products have all been enhanced with new AI features.

During the earnings call for the first quarter performance, Alphabet-C's CFO Ruth Porat stated that the company will increase investment this year, with capital expenditure expected to slightly increase compared to last year, with a focus on AI. She mentioned that investments in data center construction and servers are expected to accelerate in the second quarter and continue to grow throughout the year.

However, in the second quarter, Alphabet-C's capital expenditure was $6.89 billion, which, although higher than the nearly $6.3 billion in the first quarter, was still far below the market's expected $8.01 billion.

The second-quarter financial report did not reflect the impact of AI on search. CEO Sundar Pichai did not provide specific details when evaluating the second-quarter performance. Instead, he stated that the company's various products showed exciting momentum in the second quarter. "Our continuous leadership in the AI field, as well as our outstanding performance and innovation in engineering, are driving the next wave of evolution in search and improving all of our services."

CFO Ruth Porat commented that the second-quarter financial performance reflects the company's continued resilience in the search field, the accelerated growth of search and YouTube revenue, and the momentum of Alphabet-C's cloud business.

Porat stated that Alphabet-C will continue to invest for growth while prioritizing the persistent redesign of cost structures across the entire company and developing long-term capabilities that provide sustainable value.