Google shares slump as profit disappoints By Scott Morrison

Google reported a disappointing 18 per cent increase in first-quarter earnings today as the company continued to invest heavily in its core search business as well as in emerging technologies, something that new chief executive Larry Page has made a priority.

The internet search giant said that in the first quarter, its operating expenses represented a third of its revenue, its highest percentage since at least 2007. That number could stay high as co-founder Page has indicated a willingness to invest in perceived growth areas.

Google argued today that investments were key to future results.

"We just happen to have great opportunities to fuel. Why not carpe diem now? It's there to take. That's really the mindset we put at it," said chief financial officer Patrick Pichette during a conference call with analysts.

Mr Pichette, however, stressed the company remained committed to financial discipline and that all investments were measured against strict productivity yardsticks during regular reviews.

"If we don't see a great return on investment, you won't see us spending the money," he told analysts. "Every element of the company is scrubbed and scrutinised."

Nonetheless, the spending spike spooked shareholders, who sent Google shares tumbling 5.5 per cent in after-hours trading to $US546.88.

Mr Page, who took over as CEO from Eric Schmidt earlier this month, kicked off the call by saying he was excited about recent management changes designed to simplify the company's organization and speed up its decision-making process.

"This is all exactly as we planned, and I'm very, very excited about those changes," he told analysts.

Google continued to hire more workers in the latest period. The company added 1916 full-time employees in the first quarter, raising its total headcount to 26,316. Google's work force is now 28 per cent higher than it was a year ago, and its total headcount, which has been increasing since the third quarter of 2009, has jumped by more than a third in the past 18 months.
The company said half of the newly hired employees were working in emerging technologies.

Mr Pichette noted that an across-the-board 10 per cent raise that Google gave to employees starting this year had a "disproportionate effect" on the increase in expenses.

Colin Gillis, analyst at BGC Partners, said the growth in expenses showed that Google was in "hyper-investment mode" as it sought to capitalise on emerging opportunities in mobile software, display advertising and its YouTube video site.

It's just "the cycle in which Google finds itself. They are going to be growing expenses faster than revenue," he said, adding that Page had made it clear the company would step up investment. "No CEO comes in with the intention of driving the stock on day one. (Page) wants to put his stamp on the company and then let the stock take care of itself."

In the first quarter, Google posted a profit of $US2.3 billion ($2.18bn), or $US7.04 a share, up from $US1.96bn, or $US6.06 a share, a year earlier. Excluding stock-compensation costs and tax effects, per-share profit rose to $US8.08 from $US6.76, but fell short of the average analysts' estimate on Thomson Reuters of $US8.10.

Google's top line was stronger than expected. Revenue increased 27 per cent to $US8.58bn. Traffic-acquisition costs, commissions paid to marketing partners, comprised 25 per cent of advertising revenue. After the costs, revenue rose roughly 29 per cent to $US6.54bn, above the Thomson Reuters estimate of $US6.32bn.

Mr Pichette said the latest results demonstrate the "the extraordinary potential of areas like display and mobile" as well as the value of Google's search business.

Though search remains the company's primary revenue generator, Google's non-search projects have increased in prominence. Its Android mobile-phone operating system has become the most popular platform for smartphones, according to comScore , and Google has been pushing to increase its monetisation of video site YouTube.

Asked about the company's parameters for evaluating acquisitions, Mr Pichette said the company was looking for the perfect mix of intellectual property, strong talent and great products at a price that makes strategic sense.

He also noted that big acquisitions face an even higher bar because Google won't pull the trigger on a deal that could become a distraction, or disruptive to the company's distinct culture.

US paid clicks, a measure of how frequently consumers click on its ads, were up 18 per cent compared to a year earlier and 4 per cent from the previous quarter.

Despite earlier fears that search-advertising momentum might slow, the pace of growth accelerated in the second half of last year and held steady year-over-year in the most recent period.

However, the 4 per cent sequential climb is slower than the 11 per cent sequential gain in the fourth quarter.

The average cost that advertisers paid Google per click rose 8 per cent from a year earlier and 1 per cent from the previous quarter.

The period's results are the last under Eric Schmidt as chief executive, as Mr Page took over the CEO post earlier this month and Mr Schmidt shifted to executive chairman.

So far, Mr Page has made changes — such as a management shuffle that has the heads of major division reporting directly to him — designed to streamline decision making and promote innovation in social networking.

Additional reporting: Joan E. Solsman and Steven Russolillo