Advertisment

Cost surge under new Google CEO unnerves Street

author-image
CIOL Bureau
New Update

SAN FRANCISCO, USA: Google Inc's stunning 54 per cent spending surge in the first quarter spooked investors already worried its new CEO may take his eye off the bottom line to chase revenue growth.

Advertisment

Shares of Google slid more than 5 per cent as investors zeroed in on the rise in expenses to $2.84 billion. This dwarfed a 29 per cent jump in net revenue and reflected a record hiring spree, company-wide salary raises, and splurging on everything from marketing to technology.

For the Jan-March quarter, Google registered 17 per cent growth in net profit to $2.3 billion, or $7.04 a share, up from $1.96 billion, or $6.06 a share, in the year-ago first quarter. Excluding certain items, it earned $8.08 a share, below the average analyst expectation of $8.10 a share.

Google's revenue rose by 27 per cent to $8.58 billion in the first quarter ended March 31, 2011 from $6.77 billion in the yearago period. The company has attributed surge in quarter earnings to revenue generated by paid clicks on its search ads, which include clicks related to ads served on Google's sites and the sites of its partners.

Advertisment

Analysts expect co-founder and new Chief Executive Larry Page to keep spending on new products to spearhead an aggressive push into areas such as social networking and mobile businesses. Google executives said on Thursday the dramatically stepped-up spending was part of the company's plan to chase multibillion business opportunities.

Page, 38, a media-averse technology visionary who took over as CEO this month from decade-long veteran Eric Schmidt, came on a conference call with analysts for just a few minutes, disappointing some eager to hear his plans to jump-start growth and innovation.

Page expressed his optimism in his company's future, then departed, leaving a trail of questions that analysts directed at the other executives.

Advertisment

"My sincere hope is that over time he (Page) enunciates the strategy much more clearly," said Jim Tierney, chief investment officer of asset manager WP Stewart, which owns Google shares.

Google's battle with Facebook and Apple

Page is expected to bolster innovation and cut bureaucracy as Google battles social networking leader Facebook and Apple Inc. But his brief remarks on Thursday's call did little to reassure Wall Street about the management change.

Advertisment

"You got expenses growing faster than revenue and some people were caught by surprise by the willingness of the company to spend," said BGC Partners analyst Colin Gillis.

"But Larry Page has signaled pretty clearly that he is going to be driving up expenses. If the expenses are targeted and result in future revenue streams, then good for Larry. If not, that results in an undisciplined spending approach."

Google to hire 6,000 people this year

Advertisment

Google plans to hire more than 6,000 people this year, after taking a record 2,000 on board in the quarter and raising salaries by about 10 per cent across the board on Jan. 1.

"The discipline of the company has not changed; we're just really bullish on our prospects," Chief Financial Officer Patrick Pichette told analysts. "I can tell you every element of the company (expenses from real estate to food) is scrubbed and scrutinized."

What're your intentions?

Advertisment

The focus on Google's spending overshadowed strong first quarter net revenue growth of 29 per cent year-over-year to $6.54 billion, above the $6.32 billion expected by analysts.

For a company of Google's size "that's fairly magnificent," said WP Stewart's Tierney. "There are not a whole lot of companies in any segment that can do that."

Google said drivers of its topline growth included an 18 per cent jump in the paid clicks on its search ads, bolstered by new types of retail ads featuring product images, as well as momentum in mobile ads and video ads on its YouTube website.

Advertisment

Shares of Google, which underperformed the market in 2010, are down roughly 9 per cent since the company announced in January that Page would replace Schmidt. This week, Page moved swiftly to streamline decision-making at Google's upper ranks by reshuffling reporting lines.

The reorganization, which CFO Pichette said affected all "core pillars" of the company, raised the profile of Google's social networking group as it moves to catch up with Facebook.

Asked about Google's approach to social networking, Jeff Huber, senior vice president of Commerce & Local, said Google considered a websurfer's identity and relationships to be "key signals" among the 200 factors it uses to rank search results.

"There's tremendous improvements to be had in our core products and our core business," Page told investors Thursday.

High on investors' list of concerns are Page's attitude toward spending on strategic areas such as social networking and mobile, as well as initiatives such as self-driving cars, and the potential impact on Google's profit margins.

Google's stock fell 5.3 per cent to $547.87 after hours.

"I don't think his focus is going to be on managing to margins. I think his focus is going to be on managing to topline growth and new business areas," said Oppenheimer & Co analyst Jason Helfstein.

"The key here is margins are weaker and as a result there's still a question about the company's long-term spending intentions."

tech-news