Pressure Points: Google’s June Quarter Earnings

[00:00:02]Welcome to Pressure Points. Our topic is Google earnings and as of this recording, this is about an hour after their conference call ended, shares are down about 2 and 1/2%. They had been down like 3 and 1/2, so it had paired some of the losses kind of during the conference call, but I'll start with a highest level is first and foremost is they had an incredible cloud number.

[00:00:23]The cloud number was up 83 82% year-over-year. The street was looking for 63%.

[00:00:29]I mean, crushed absolutely crushed the number and what got me a little bit worried is when that number came out, that huge number, I thought the stock was going to be up 5% on this. It was essentially flat and thought what are what is knowing at investors here and the knowing thing was we don't know what that CapEx number is going to be. And so, I'll jump into the pressure points.

[00:00:52]Uh this is the CapEx number and ultimately what we learned was uh they're going to increase it by about 4% relative to where the street was at for calendar 26. They didn't give any direct commentary about calendar 27, but said that they will continue to be making significant investments in CapEx down the road. So, that 4% bump is a similar bump to what we saw last quarter when they re-upped their CapEx guidance, but the stock traded off a few percent on that number and I think this keeps coming back to, you know, what is the ultimate point where they don't have to be pushing CapEx as much and they're going to start to see continue to see uh the benefit from all that. But that CapEx number, like it or not, really stung the stock in after hours.

[00:01:39]A second, I'll call it stinger, was related to a commentary about margins in cloud. So, cloud margins are at basically a peak. I think it's 37% uh ish for the June quarter and the CFO said that to expect those to decline in the back half of the year.

[00:01:58]It's not what investors like to see when you have a trend of improving margins.

[00:02:03]The decline is based on what this They're going to have to go to third parties like SpaceX to get capacity and that's less profitable for them. And so, eventually they're going to continue to build out their capacity, so they probably need to rely less on third parties, but in the meantime, and that could last for a year or 2 years or 3 years, that's going to be positive or that will have an impact on margins.

[00:02:28]So, let's shift and just talk about like the next 2 to 3 years in terms of what's going on with cloud because another key takeaway was the backlog grew 50 billion quarter over quarter in cloud. Now, it now reaches at 514 billion. And so, to put those numbers into perspective, they'll probably over the next four quarters do something like 125 to 150, pretty wide range there, billion in revenue for Google Cloud, but with that backlog is such a huge number.

[00:02:58]And so, they do long-term contracts with customers, and so that's why that backlog gets so big. But it effectively, we have no idea when they're going to get to supply-demand equilibrium here.

[00:03:09]And I think that number, that 50 billion in incremental and 500 billion in total backlog really speaks to the demand that's out there for AI. And ultimately is that I think another key takeaway out outside of this is that we can continue to feel good that Google Cloud growth is going to be kind of above the street price for the next few years. So, it's street's looking for around 60% growth this year, 60 to 65%, and then for next year, it's at just over 50%, but safe to say next year will be higher than 50% where the current street is at.

[00:03:48]Also, I'll briefly I on search. That was up 16.5% it did miss the street estimate which was 17.1% so a miss is a miss even if it's fractional. And I think the overall commentary is still very positive here.

[00:04:03]They started talking about AI mode ads and this has been a big lever that's been kind of in the wings that they haven't really capitalized on. But they mentioned that customers are engaging in these ads. It could be an ad when you're having a conversation with Gemini about planning a trip. There would be a very clearly marked reason or clearly marked ad that comes into that conversation.

[00:04:27]And so that's reminds me of kind of what happened from 2010 to 2015 as mobile became a bigger and bigger part of Google's story. They could continue to increase the coverage of mobile ads and almost manage that growth of of Google search. Now, that's a very long-term positive. Some of that positivity got dampened by the CFO's comments about difficult comps going forward around search. Again, it was up 16.5% in the district reported June quarter and the street's kind of looking for some steps down. I think it goes to like the imprint numbers are for 15% and 13% for September and December respectively.

[00:05:07]So in other words, the commentary from the CFO to expect decelerating search growth rates was already reflected in street numbers and so kind of when you put that search equation together is it's in a good place. They're doing a good job of monetizing AI mode and overviews and they have new levers to kind of pull along that.

[00:05:26]I'm going to end with a toy department update with Waymo. They said they've done a million deliveries now. A million deliveries. That is accounts for based on my math probably just under 5% of total usage of of Waymo. This would be like through partnerships through DoorDash and Walmart. Just a great use case for autonomy is to have those deliveries. Obviously, there's a big market robot taxi is a very big market and driving things to people's homes. And so, keep an eye out for that lever around physical AI.

[00:06:01]On behalf of Pressure Points, I'm Jean.

[00:06:03]Bye for now.