A Blog by Jonathan Low


Jan 27, 2017

Google Parent Alpabet Poised To Overtake Microsoft in Revenues

Google surpassed Microsoft in market value a long time ago.

But the reverse in sales is a symbolic and actual manifestation of the change in the way technology is utilized - and monetized. JL

Leslie Hook and colleagues report in the Financial Times:

Google parent Alphabet is poised to overtake Microsoft in terms of revenues this year, marking a symbolic changing of the guard between one of tech’s most powerful software companies and an upstart from the dotcom era.
After a record-setting year for Silicon Valley’s biggest tech companies, Google parent Alphabet is poised to overtake Microsoft in terms of revenues this year, marking a symbolic changing of the guard between one of tech’s most powerful software companies and an upstart from the dotcom era.
Quarterly earnings reports this week confirmed Google was on track to exceed $100bn in revenues this year thanks to surging advertising revenues, and would probably pass Microsoft as it reaches that milestone. In fiscal 2016, Alphabet’s revenues came to $90.3bn, just behind Microsoft’s at $93.1bn, after adjustments for deferred revenue from Windows 10.
Alphabet’s fourth-quarter earnings underscored the company’s strong growth in its advertising business, as profits rose 8 per cent in the quarter and revenues rose 22 per cent. Microsoft is growing more slowly, with revenues up 2 per cent in the fourth quarter compared with a year ago.
One of the areas where Alphabet and Microsoft compete most fiercely is cloud services, a business to which both have been devoting increasing resources.
Microsoft this week reported that its cloud service Azure had seen revenues double from a year earlier. The company also helped assuage investor fears over the margins of its newer growth businesses, by disclosing a commercial cloud gross margin of 48 per cent — on par with the previous quarter.
At Alphabet, the cloud is on a “terrific upswing”, according to chief executive Sundar Pichai, who said the company had accelerated its product rollout and formed alliances with companies from Intel to workplace chat app Slack.
Alphabet, formerly known as Google, does not break out its cloud revenue, bucketing them in “other” with hardware and Google Play, which rose 62 per cent in the quarter year on year to $3.4bn.“We routinely hear from customers that we have now moved well beyond ‘table stakes’,” said Mr Pichai, adding they had differentiated their products from rivals in data analytics and machine learning, security and application development tools.
The growth in cloud computing is also helping chipmakers such as Intel, which reported on Thursday that chip sales to data centres were up 8 per cent in the most recent quarter year on year.
As Microsoft and Alphabet race to cross the $100bn revenue threshold, the search engine company will be helped by the popularity of products such as YouTube. Marketers desperate to get in front of teenagers and consumers who have ditched pay-TV for on-demand services have rushed to spend money on Alphabet’s YouTube, which was one source of the strong growth in the fourth quarter.
Unlike Microsoft, Alphabet missed its earnings expectations as costs rose by 3 percentage points year on year, as it invested in data centres, hardware and buying content for YouTube, as well as a soaring tax bill.
But shares only fell 2 per cent in after-market trading on Thursday — a sign investors were less jittery about Google’s potential to overspend since Ruth Porat, chief financial officer, joined from Morgan Stanley almost two years ago.
Meanwhile, Microsoft will have to rely on continued improvement in the PC market, as well as the growth of its cloud services, to reach the $100bn mark.Microsoft’s better than expected profits for the fourth quarter were driven largely by improvements in its personal computing business, which was the only part of the company that showed gains in operating profit.
“Their largest business, which is PC, is showing a big operating margin improvement,” points out Brent Thill, analyst at UBS. “The PC is finding some stability.”
Intel’s fourth quarter also saw an uplift from the PC market, particularly avid video-gamers who are prepared to pay top dollar for the highest-performing equipment.
After a five-year decline in personal computer sales, this year is expected to mark an improvement. PC shipments are forecast to fall 1 per cent this year, according to Gartner, the consultancy, compared with a 6 per cent drop last year.
Microsoft reported revenues that exceeded expectations in its personal computing division in the fiscal fourth quarter, driven by strong sales of Windows licences to PC manufacturers. Revenues in Microsoft’s personal computing division were $11.8bn, down 4 per cent from the previous year, partly due to a drop in phone sales.
Intel’s client computing unit, which includes PC chips, grew 4 per cent as a decline in sales volumes was offset by growth in average selling prices and the popularity of high-end gaming systems. “We believe that enthusiastic market will continue,” said Brian Krzanich, Intel’s chief executive.
However, he noted that Intel had taken a “slightly more conservative view” of the PC market than some market researchers for 2017, with softness in emerging markets such as China, Russia and Latin America.
As the PC market’s overall decline slows from high single-digits to low single-digits in percentage terms, “it is starting to get better but I don’t think we are back to zero or positive unit [growth],” Mr Krzanich said.


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