Google Feels a Revenue Pinch

Google warned investors on Wednesday that a rise in spending on its data centers and other infrastructure, plus a rise in cash compensation to its employees, may crimp its finances.

In its quarterly 10-Q report (pictured left), Google said spending on data centers will rise, a point that Google execs have been repeating over the last year. The growth in spending, Google said, will outpace its growth in revenue, leading to a decreased operating margin.

“The annual rate of growth in 2006 of our spending on property and equipment will be substantially greater than the annual rate of growth of our revenues,” it said in the filing.

Google also noted that the cost of acquiring new customers for its ad network will likely increase, and that the company’s revenue growth rate will likely decline.

“Our revenue growth rate has generally declined over time, and we expect it will continue to do so as a result of increasing competition and the difficulty of maintaining growth rates as our revenues increase to higher levels,” it said.

Per usual, Google also noted in the report that its income fluctuates with seasonal use of the Internet. Internet use, and thus search queries, usually decline in the summer months.

However, it’s possible that Google’s significant investments in offline advertising, such as satellite and terrestrial radio, could partially offset that trend. Emily White, Google’s director of sales and operations, said during the SES conference this week that online search queries increase in conjunction with offline advertising.

So it’s plausible to suggest that part of Google’s advertising strategy is to use offline advertising not only to make revenue from targeted radio and print ads, but also to subsequently drive traffic to Google’s online search engine.

Update: Google is also looking to invest an additional $1B in India, according to Bear Stearns.