Alphabet Q1 FY 2018 Earnings: Google Wants Microsoft’s Enterprise Customers

Alphabet released its Q1 FY 2018 results on April 23, 2018, reporting that the Google segment beat revenue targets with $31 billion in revenue, up 26% year-over-year (y-o-y). Amid announcements about Youtube, Nest, and privacy regulations, there was a clear emphasis on Google Cloud and the significant opportunity Google has to further accelerate revenue growth through increased adoption of G Suite within large enterprises.

Q1 Highlights

• Google sites revenues were $22B, up 26% y-o-y
• Network revenues were $4.6B, up 16% y-o-y
• Other revenues (which include Cloud) were $4.4B, up 36% y-o-y

Large Enterprises Adopting Google Cloud and G Suite

During the previous quarterly earnings call, Alphabet announced that Google Cloud became a $1B per quarter business, an important milestone for their Cloud offering. While similar commentary for Google Cloud was left out this quarter, they did announce strong momentum with growth across the board. They also made it a point to mention that they signed significantly larger, more strategic deals for Cloud.

Google also stated that G Suite has reached a point where it will serve all the needs of a large enterprise and highlighted enterprise customer wins such as Colgate-Palmolive Company, Airbus, and Thailand’s Krung Thai Bank to underscore the fact that large enterprises are already running G Suite as a solution.  Adoption by enterprise customers such as these and others directly led to G Suite revenue growth acceleration in the quarter as well.

Investments Suggest Cloud Focus

Alphabet stated they are investing in data center expansion and increased network capacity to support their growth outlook across Google, including machine learning and Cloud. There was also an increase in Google’s sales and marketing expenses which reflect advertising investments in Cloud, another indicator that Google recognizes an opportunity in the Cloud and is attempting to capitalize on it.

Strategic Partnerships Begin to Bear Fruit

Google’s partnerships and go-to-market programs with large IT vendors SAP, Cisco, and Salesforce were also highlighted during the earnings call. They specifically mentioned these partnerships and programs are beginning to bear fruit. Since SAP (ERP) and Salesforce (CRM) are leaders in their respective offerings, many of the enterprises Google is targeting have them installed — often both — as key strategic solutions within their IT portfolio. Many — if not all — of those same enterprises are also long-standing Microsoft customers that are being pressured by Microsoft to convert to the Cloud, which presents a huge opportunity for Google or one of their partners to introduce G Suite as an alternative option.

SAP and Salesforce customers that have yet to adopt Microsoft Office 365 should expect these vendors to apply pressure and push conversations regarding switching from Microsoft to Google G Suite rather than going with Microsoft Office 365. For those Microsoft customers that have already made the leap, we fully expect the same conversations to be pushed, especially as the renewal date approaches and the potential opportunity to move away presents itself.  Google has cited security, data analytics, and machine learning as key competitive differentiators and will likely focus on these aspects as reasons to switch. As more enterprises entertain G Suite discussions, we encourage them to challenge Google to give proof points, references, and more detailed reasons why they are the superior option. If done appropriately, this knowledge could also be effectively used as leverage during the upcoming renewal discussions with Microsoft.

For years, Microsoft has enjoyed a comfortable position in large enterprises, as they have been the only truly viable productivity suite option. More than ever before, especially as companies continue to get over the hurdle of moving to the Cloud, Google’s G Suite has become — and will remain — a serious viable alternative to Microsoft Office 365.

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