Google Cloud revenue climbs in Q1, ad sales sink due to pandemic

Google's cloud business was a bright spot in an otherwise mixed quarter for Alphabet.

Google's cloud business was a bright spot in an otherwise mixed quarter for Alphabet, as ad revenues across Search and YouTube took a nosedive at the onset of the coronavirus pandemic. For Q1 2020, Google Cloud -- which includes Google Cloud Platform and G Suite -- brought in $2.77 billion, up 52% from $1.825 billion a year prior and $2.614 billion the previous quarter.

While Advertising continues to generate the most revenue for Google, the number is down significantly compared to last quarter. In Q1, Google ad revenues came to $33.76 billion, compared to $37.934 billion in Q4 2019.

The same goes for Google Search and other ad revenue (excluding YouTube), which brought in $24.502 billion in Q1, down from $27.185 billion in Q4. Revenue for YouTube ads was down to $4.038 billion from $4.717 billion last quarter. 

"Performance was strong during the first two months of the quarter, but then in March we experienced a significant slowdown in ad revenues," said Ruth Porat, Chief Financial Officer of Alphabet and Google. "We are sharpening our focus on executing more efficiently, while continuing to invest in our long-term opportunities."

Despite the sharp decline in ad sales, eMarketer principal analyst Nicole Perrin noted that any long term impact to Google's search business will likely not be severe.

"The deceleration to Google's display ad businesses, including Google Display Network and YouTube, was lower, and again fell in line with our relatively optimistic scenarios for digital advertising in Q1," Perrin said. "That suggests a cautiously optimistic outlook for Q2 -- though growth will come in worse than Q1 as a whole, since Q1 impacts were limited to the end of the quarter."

As for Alphabet's overall Q1 results, diluted earnings per share came to $9.87 on revenue of $41.2 billion, up 13% year-over-year. On average, Wall Street was looking for Q1 earnings of $10.38 per share with $40.33 billion in revenue.

In Alphabet's moonshot "Other bets" category, revenue was down to $135 million while the operating loss climbed to $1.1 billion. 

Google will slow down hiring for the rest of 2020, CEO Sundar Pichai said. The headcount at the end of the first quarter was 123,048.

On a call with analysts, Porat elaborated on the business impact of the coronavirus pandemic and what Google anticipates in terms of economic recovery and its ad revenue.

At the inception of the crisis, the increase in user interest was for information about COVID-19 and related noncommercial topics. Although we have seen some very early signs of recovery in commercial search behavior by users. It is not clear how durable or monetizable this behavior will be. In order to gauge the ongoing potential financial impact to our business from COVID-19, a a key signal to monitor is macroeconomic performance, which is tended to be correlated with advertising spend. As of today, we anticipate that the second quarter will be a difficult one for our advertising business. As we move beyond the crisis, and the global economy normalizes, this should be reflected in our advertising revenues, but it would be premature to comment on timing, given all the variables here.