Cost surge under new Google CEO unnerves Street

SAN FRANCISCO Fri Apr 15, 2011 10:37am EDT

An employee answers phone calls at the switchboard of the Google office in Zurich, August 18, 2009. REUTERS/Christian Hartmann

An employee answers phone calls at the switchboard of the Google office in Zurich, August 18, 2009.

Credit: Reuters/Christian Hartmann

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Thu, Apr 14 2011

SAN FRANCISCO (Reuters) - Google Inc's stunning 54 percent 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.

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

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.

"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.

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.

"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 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 percent across the board on January 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?

The focus on Google's spending overshadowed strong first quarter net revenue growth of 29 percent 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 percent 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.

Shares of Google, which underperformed the market in 2010, are down roughly 9 percent 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.

Google posted net income of $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.

"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 percent 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."

(Writing by Edwin Chan; Editing by Richard Chang)

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Comments (9)
Larry, Please take a page out of Steve Jobs’ playbook. Steve would never spend 2 minutes being optimistic and then leaving.

Apr 14, 2011 11:04pm EDT  --  Report as abuse
GeyeJo wrote:
They have billions in the coffers and the economy is down. Why not spend? Sitting on it, will only cost them money as inflation skyrockets. It also looks like a large portion of their past spending is paying off with revenue as up as much as it is. Being aggressive in this market is a great strategy if you aim to take over the world…

For the record, I am not a Google investor.

Apr 15, 2011 3:46am EDT  --  Report as abuse
jscott418 wrote:
It will be interesting to finally see if these Geeks at Google actually have any business sense. Because I have always thought they have tended to rely on their advertising revenue but in other area’s they (google) tended to be weak at competing. Android may be a bright spot but as we know its more about advertising with that. Their Google Chrome OS seems to be floundering and I am not evn sure if Google has a real stable business model down the road.

Apr 15, 2011 6:52am EDT  --  Report as abuse
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