Google Cloud's high profile deals and pandemic-era growth are keeping the company firmly in third place among U.S. hyperscalers, even as the business unit's net loss captures enterprise attention.
Despite operating on a $5.6 billion loss last year, Google Cloud brought in over $13 billion in revenue, according to the fiscal year 2020 earnings report. In the first time Alphabet segmented out its cloud earnings, the report signals growth from Google Cloud's $8.9 billion revenue in the previous fiscal year as the company leans further into its cloud arm.
Google Cloud's revenue grew 47% year-over-year with the ongoing momentum from new enterprise customers and solutions based in AI and machine learning, according to Alphabet CEO Sundar Pichai on the company's earnings call.
Analysts agree the cloud unit's loss does not represent a business failure.
"At the moment, the net loss isn’t much to be alarmed by," Tracy Woo, senior analyst serving infrastructure and operations professionals at Forrester, told CIO Dive in an email. "It’s typical for growth areas in companies to report losses while its legacy business (in this case, ad revenue and YouTube) will sustain the rest of the business."
Many credit Google Cloud CEO Thomas Kurian for the growth. Bringing decades of experience from Oracle, Kurian joined Google Cloud two years ago and accelerated investments to strengthen the cloud business, according to the earnings call.
"Nobody knows enterprise software better than Thomas Kurian," said Stanton Jones, director and principal analyst at ISG. "He is there to help them penetrate into the enterprise, but it's going to take a lot of spending to get there."
The consumer and enterprise services work in tandem to support the company at large. While the cloud segment takes a loss, the high-profit consumer services subsidize the endeavor.
"Selling to enterprise businesses is a different ballgame," said Dhaval Moogimane, a director in West Monroe's high-tech and software practice. "It's a change from their past, from their traditional consumer business, so it is certainly expensive."
Beyond the consumer, into the enterprise
Google's most well-known — and highest earning — services face the consumer, such as its search engine and advertisements. The company's cloud unit relies on gaining enterprise trust to earn dollars.
"Google has a history of getting into and out of businesses," said Jones. "This is really the first time on the enterprise side where they are pouring billions in and at this point, they are absolutely winning deals and growing."
Earlier this week, before Google released its earnings report, the company announced a highly publicized deal with Ford. The carmaker and the cloud provider struck a six-year deal to fast track data, AI and machine learning capabilities supporting a data-driven business model.
Google also listed cloud deals with the Kyoto University Graduate School of Medicine, MercadoLibre, Optus and Otto Group in the earnings call.
"Typically, these are enterprise-oriented subscription businesses so you'll have high net retention rates," said Moogimane. "As you start to scale that recurring revenue business, it'll drive improvements in the operating leverage."
The company's venture into enterprise cloud targets five industries where it knows it can excel: manufacturing, financial services, retail, healthcare, and media/entertainment. "This strategy requires an investment of people and technology, which will eat into its profits," said Woo.
In other words, the FY2020 loss comes as no surprise. Google Cloud's growth relies on major expenditures up front that the company plans to turn into profits later on. And for businesses making cloud decisions, it's nothing to worry about.
"The operating loss for Google is to be expected," said Jones. "They appear to be all in on subsidizing this and building a world-class enterprise cloud. Every signal that they're giving to the market is that they're in this for the long haul."
Google Cloud's efforts to become an enterprise mainstay have earned its spot on the list of widely used cloud vendors, but competition remains with AWS, Microsoft and the tons of other cloud providers. In 2019, Amazon took 45% of the worldwide IaaS public cloud market share with Microsoft following at 17.9%, Alibaba at 9.1% and Google at 5.3%, according to Gartner data.
"At the end of the day, it's going to be good from an end customer standpoint to have options that create some price competitiveness," said Moogimane. "It'll create innovation."