Google's Page Worries Wall Street as Spending Rises

By Clint Boulton  |  Posted 2011-04-16

Google's Page Worries Wall Street as Spending Rises

Google executives reported solid earnings and a 17 percent year-over-year profit for the first quarter and painted a rosy picture for the future of search, mobile and display advertising April 14.

That wasn't enough to satisfy financial analysts who blanched at the company's operating expenses of $2.84 billion, firmly $1 billion more than the search giant reported for Q1 2010. The increased costs were partially due to the almost 2,000 new workers it hired during the quarter.

Shares of Google fell 5 percent in after-hours trading, dipped 6.85 percent in Friday morning trading, and slid 7.5 percent by 3 p.m. EST to $534.64.

It wasn't just about the finances. Analysts expected new CEO Larry Page to offer guidance about the way he would run the company. What they got for their time from Page was a vague two-minute bulletin about how Google is going great and the new management structure he put in place is working exactly as planned.

"I'm managing the day-to-day operations of Google as the CEO, working very closely with my team, and I'm really excited about the progress we've had there. I think we really hit the ground running."

Eric Jackson, founder and managing member of Ironfire Capital LLC, wrote in a column for that Page's "performance last night was abysmal and simply fed into the worst fears investors have about what his leadership will mean for Google."

Indeed, Page didn't say what Google was working to address. Analysts wasted little time guessing how Google's investment strategy will play out.

Gleacher and Co.'s Yun Kim said Google's recent efforts promoting non-search businesses, such as Chrome and Android, and its efforts to attract smaller and local advertisers are continuing to weigh heavily on its overall cost structure.

"While Street EPS estimates are likely to come down and reflect more realistic operating expenses going forward, we are somewhat wary of the company's continued investment in non-search business, which could accelerate under the new CEO, and also given its recent acceleration in its core search business," Kim wrote April 15.

Google Spending a Lot on Social

The jury is still out on the Chrome browser/operating system combination; neither have made the company money. But there's no question Android is making bank. Google said last fall mobile ads were operating at a $1 billion run-rate.

Jeff Huber, senior vice president of commerce and local, disclosed some nice mobile metrics for Android on the call, noting that 350,000 Android smartphones are activated daily and that more than 3 billion apps have been installed from the Android Market to date.

Caris and Co.'s Sandeep Aggarwal called Google's Android and mobile ad growth a "phenomenal growth story," and described Google's display advertising and YouTube ramp impressive.

However, with an eye on rising expenses, Aggarwal also said that for every new full-time employee Google is hiring, they are also hiring one contractor. Moreover, disproportionately more time and money are going in social, mobile, local, and display.

"Google's attempts to embed social media into its core offering will take time and will be costly, as the company aims to extend leadership beyond its core search castle," he wrote in a note April 15.

Aggarwal, fresh off of attending 2011 Ad:Tech Conference in San Francisco, has his finger on the social advertising pulse. While the conference has been traditionally dominated by Google's paid search ad ecosystem, he said a Facebook-led social media ecosystem is spawning several product and service companies for social media.

That's a big reason why Page has tied employee bonuses to the company's social networking performance. Google isn't going to "beat" Facebook in terms of building a bigger social network, but it's new +1 button is designed for aggressive monetization when it rolls out to third-party players later this year.

With desktop search and mobile search corralled and the dominant ad share for both, Google merely needs to be a player in social ads to round out its YouTube display ad offerings.

But analysts and investors are less sanguine about this, given Google's spotty track record in social. If Google spends billions to forge a formidable social software war chest it had better do so in way that pads the bottom line.


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