Google parent company Alphabet spent more than $13 billion in the most recent quarter to build data centers and fund other efforts to stay ahead of mounting artificial intelligence competition, tightening its grip on allocating capital for real estate to preserve cash for its highest priorities.
The company, based in Mountain View, California, will take "a measured approach" for its real estate investments for at least the remainder of the year, CEO Sundar Pichai told analysts on the company's earnings call on Tuesday, underscoring its commitment to preserving the bulk of its financial resources for its widened bet on the artificial intelligence market.
The strategy, Pichai said, is to "match the current and future needs of our hybrid workforce as well as our local community," leaving the door open for additional cuts to its previously vast office real estate footprint and other high-profile developments underway around the world.
Alphabet reported a 13.5% increase in total revenue to nearly $85 billion for the second quarter ended June 30, a slowdown compared to the growth rate it reported for the three months at the start of the year. Roughly $13.2 billion of that was directed to capital expenditures that included building more data centers and expenses related to operating AI systems, representing a more than 92% jump from the same time last year.
"Our leadership team remains focused on our efforts to moderate the pace of expense growth in order to create capacity for the increases in expenses associated with the higher levels of investments in our technical infrastructure," Chief Financial Officer Ruth Porat said on the call. "We continue to focus on improving overall efficiencies as we invest for long-term returns."
The CFO added that the company's headcount growth will remain muted as Alphabet maintains a slower hiring pace.
The Google parent employed about 181,800 people by the end of the second quarter, down from the more than 190,230-person workforce it had the year prior and a notable drop after decades of growth.
The company reported $23.6 billion of net income in the second quarter, up 28.5% from the same time last year. Executives expect to spend about $12 billion during each of the year's two remaining quarters on capital expenditure spending, "predominantly driven" by investments in growing its AI stake, Porat said.
Building On Cuts
Google has been at the forefront of trends that have rippled across the global office market, in part due to its investments in employee perks and amenities to attract and retain talent. However, it was also among some of the world's largest tech companies that were caught by surprise by pandemic-related growth, hired aggressively as a response, and are now walking back investments they had made that no longer line up with their headcounts or real estate needs.
The company leases more than 38.6 million square feet of office and flexible space around the world, according to CoStar data.
Alphabet paid roughly $4 billion in expenses last year related to its restructuring plans, including one of the biggest round of job cuts in Alphabet's history as well as a series of office closings across the country.
The company has continued to cut its workforce this year, and earlier this month, it renewed the lease for one of its San Francisco Bay Area offices, but for about 55% less space.
And more cuts could be on the table as Porat said the company remains committed to "durably re-engineering our cost base."
She added that "what we're really focused on is adding to velocity and efficiency. Headcount is down year over year, and across our leadership team, we're continuing to optimize our real estate portfolio and are committed to efforts that all build to that phrase, durably engineer our cost base."