April 14, 2011 / 4:22 AM / 9 years ago

Cost surge under new Google CEO unnerves Street

SAN FRANCISCO (Reuters) - Google Inc’s stunning 54 percent spending surge spooked investors already worried its new CEO may take his eye off the bottom line to chase revenue growth, driving its shares more than 5 percent lower.

A construction worker walks past a logo next to the main entrance of the Google building in Zurich in this May 25, 2010 file photograph. REUTERS/Arnd Wiegmann/Files

Investors zeroed in on the stunning surge in expenses to $2.84 billion, which 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 now 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 needed to galvanize growth.

Page, 38, a media-averse technology wiz 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 in his wake that analysts directed at the other executives.

“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.”

Page is expected to bolster innovation and cut bureaucracy as Google battles social networking leader Facebook and Apple Inc.

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,” CFO Patrick Pichette told analysts. “I can tell you every element of the company (expenses from real estate to food) is scrubbed and scrutinized.”


The company posted net income of $2.3 billion in the first quarter, or $7.04 a share, up from $1.96 billion, or $6.06 a share, in the year-ago period.

Excluding certain items, Google said it earned $8.08 a share, below the average analyst expectation of $8.10 a share.

Google’s net revenue rose to $6.54 billion in the first quarter, above the $6.32 billion expected by analysts.

The average cost-per-click to advertisers for its search ads in the first quarter grew about 8 percent year-over-year and decreased 1 percent from the fourth quarter.

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, but investors are anxious about how the management change could affect the company.

Page, with his succinct speech on Thursday, remains very much uppermost on investors’ minds. Google’s stock fell 5.3 percent to $547.87 in after-hours trade.

Google is ramping up efforts to supplement its core search advertising business with revenue from display and mobile ads. And the company is increasingly focused on social networking and the local ad market, where rivals Facebook and online coupon service Groupon rule the roost.

Google co-founder Larry Page in a file photo. REUTERS/Rick Wilking

Page’s attitude toward spending on such strategic areas, as well as on less crucial initiatives such as self-driving cars, and the potential impact on Google’s profit margins are high on investors’ list of concerns.

“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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