Google's first quarter earnings miss projections as expenses spike; Page makes brief appearance

Google's first quarter earnings miss projections as expenses spike; Page makes brief appearance

Summary: Google's first quarter earnings fell short of Wall Street expectations as the company continued to invest heavily in data center infrastructure and headcount.

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Google's first quarter earnings fell short of Wall Street expectations as the company continued to invest heavily in data center infrastructure and headcount.

Google reported first quarter earnings of $2.8 billion, or $7.04 a share, on revenue excluding traffic acquisition costs of $6.54 billion (statement, preview). Non-GAAP earnings were $8.08 a share. Wall Street was expecting earnings of $8.10 a share on revenue of $6.32 billion.

Google CEO Larry Page made a brief appearance on the company's conference call. He said the reorganization has gone as planned and the team has "hit the ground running." Page added that the quarter worked out well and he was excited about moves to "simplify our org.

"I'm very optimistic about our future," said Page. Here's what Page said in full:

It's great to take just a few minutes with all of you. We've had a tremendous quarter, 27% year over year revenue growth in Q1. I'm really excited about that and I think it shows the strength of our business and our continuing -- kind of continuing growth really in the tech industry. It's really still at the beginning from a user perspective. There's tremendous improvements to be had in our core products and our core business, and we are really excited about that. I also wanted to mention a little bit about the management team. Everything we told you last quarter has happened as we expected. It's all working very well, exactly as we planned. I'll just reiterate that quickly I am managing the day-to-day operations of Google as 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 (Schmidt) of course is focused externally on the government partnerships, government relations, and partnership outreaches. Last quarter alone, he was in Germany, Brazil, Argentina and Spain. He's been just doing tremendous things for the Company. Sergey, as we mentioned, is working very intensely on a few emerging projects for us. Like I said, this is all exactly as we planned, and I'm very, very excited about those changes. I'd also mention we made a number of changes to just simplify our org and improve our velocity and execution, basically simplify our reporting structures and such. Now I'm very excited about Google and our momentum, and I'm very, very optimistic about our future. I also just want to mention we have Jonathan Rosenberg, who's usually done this call, is transitioning out of the Company as we have announced a while ago. I really wanted to thank him for all of his insights and hard work and all of the fine communication with all of you. And so we will clearly miss him, and we really want to thank him from the bottom of our hearts. So those are the main things I wanted to say. I'm tremendously excited about all of the things that lay before us as a company, and I also want us to say you're in very good hands with the team here.

With Google it's a tug-of-war between earnings today and investments for tomorrow. Indeed, Google beefed up a good bit and ended the first quarter with 26,316 employees compared to 24,400 at the end of the fourth quarter. That level of investment has investors worried about profit margins.

CFO Patrick Pichette kept Google's common refrain going. "It's clear that our past investments have been crucial to our success today--which is why we continue to invest for the long term," he said. "We will continue to make capital investments."

All units at Google are expected to show productivity as they invest, said Pichette. Pichette was making the case that Google closely watches expenses, but analysts were skeptical.

On the conference call, Pichette was upbeat about Google's progress and cited Android, display ad progress and YouTube develop as a win-win platform.

Highlights from Google's earnings call:

  • 350,000 Android devices activated every day.
  • Google is investing in marketing the Chrome browser. Why? It's a locked in user and that lowers traffic acquisition costs. Google is tracking the lifetime value of a Chrome user and there are real returns there.
  • Enterprise business continues to grow.
  • Japan hurt international revenue.
  • New hires are working on areas  "In fact, over half the [newglers] who joined this quarter are going to be working in high potential and revenue growth areas like YouTube, mobile, Chrome, commerce and local, and enterprise," said Jeff Huber, senior vice president of commerce and local at Google.
  • Social is a important as a search results signal.

By the numbers:

  • Google's owned and operated sites generated $5.88 billion in first quarter revenue, or 69 percent of total sales. AdSense delivered first quarter sales of $2.43 billion, or 28 percent of revenue.
  • International revenue was 53 percent of the total sales pie in line with the year ago percentage.
  • Paid clicks were up 18 percent in the first quarter compared to a year ago. Cost per click was up 8 percent.
  • Data center expenses---or other cost of revenue---were $897 million, or 10 percent of sales.
  • Google ended the quarter with $36.7 billion in cash and equivalents.

2011 Q1 Google Earnings Slides
View more presentations from Earnings

Related:

Topics: Enterprise Software, Banking, Google

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28 comments
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  • This can't be true

    This doesn't happen to "cool" companies like Google because everyone uses your stuff because it's "cool".
    :)
    Will Farrell
    • @Will Farrell

      I know iHaters use this line all the time and I can kind of understand if it's about apple since style has always been a factor when people purchase apple products. But implying people use Google because it's "cool". This I don't get.
      anono
      • RE: Google's first quarter earnings miss projections as expenses spike; Page makes brief appearance

        @anono
        No you have to read DonnieBoy's comment on a different blog. He briefly said people would be considered cool or super cool if they use Google products, http://www.zdnet.com/tb/1-95841-1844566?tag=talkback-river;1_95841_1844566
        Ram U
      • @Rama.Net

        Oh if that comment was aimed purely at DonnieBoy I totally understand having read his comments.
        anono
      • Guys, Apple and Google have a big cool factor that Microsoft does not.

        Windows propeller heads hate that. But, if they would just get rid of Balmer and bring in a younger CEO, they might get some of it back.
        DonnieBoy
      • It's for Donnieboy, because he hates the truth

        @anono
        He thinks that [i]everybody[/i] thinks that Google is cool (right along side of Apple) and that their products are used and loved by everyone.

        I don't know of anyone that thinks that, Google is viewed as any other utility item (lawnmower, shovel, microwave oven, router, network card, ect) - they're just the place to go to search for shoes, nothing else.

        But to Donnieboy, they are cool, and everyone is falling over each other talking about Google.

        I haven't seen that, and anybody who says they're not cool is just a proppelerhead, or an MS lover, but probally both. :)
        Will Farrell
      • RE: Google's first quarter earnings miss projections as expenses spike; Page makes brief appearance

        @anono That's because google doesn't appeal to pseudo-intellectuals ala Apple, it appeals to pseudo-techs. It's part of the "it's cool to be a geek, but those security guys are lame" crowd.
        ITSamurai
  • Time to sell your stock in Google, Apple and Microsoft

    These companies are going to spend the next few years beating the crap out of each other while sucking the margins out of each other's core businesses. This is going to be great for consumers, but lousy for shareholders.
    x I'm tc
    • @jdakula

      Google and MS I can understand because a part of their business model is to do what the other is doing and offer it for free (or even pay customers in the case of Bing cashback), but I don't think it's time to sell Apple yet even after its recent growth. They still seem to be looking at new ways to grow their business.
      anono
      • RE: Google's first quarter earnings miss projections as expenses spike; Page makes brief appearance

        @anono I'm not sure I follow your logic. How Apple exempt from competition?

        iTunes - YouTube (?) - Zune
        iPod - Android PMPs - ZuneHD
        iPhone - Android Phones - WP7
        iPad - Honeycomb - Ha!
        iWork - Apps - Office
        Safari - Chrome - IE
        OSX - Chrome OS (?) - Windows
        ? - App Engine - Azure
        Apple TV - Google TV - xBox
        ? - Google - Bing

        Apple has had a brilliant decade, but so has Google. Microsoft has been asleep at the wheel, but they seem to be turning the ship -- their tablet strategy being a huge gaping hole. The next decade is shaping up to be pretty exciting.
        Rich Miles
      • @ Rich Miles don't confuse competition with making money

        @Rich Miles<br><br>one example: Google says it's on track to make 1 billion in Mobile as they stated in previous announcements (I assume this is per YEAR as that was what they said last time - I haven't gone through the fine details of the current report but just read the number from the Q&A).<br><br>That 1 b is from all profits from search, services, ads on non PC platforms. It includes Apple iOS which runs Google search etc. So android in spite of all the assumptions of tremendous growth from market share only generates about half a billion for Google.<br><br>Apple made $10.47 billion from iPhone alone last QUARTER. that's before iADs, App Store, iTunes, iPads etc. Apple will make 50 billion or more from mobile a year.<br><br>Activations for Android and iOS if you count iPod touches iPads are about equal now, but apple makes MUCH more money than Google in mobile.<br><br>Apple makes about 30-40% if world cell phone profits both smart and dumb (the rest is divided between Android, Nokia Symbian, Win Mo and Rim, dozens of manufacturers). apple also makes about the same amount in Macs from the PC market.<br><br>All those OEMS making similar rival products are eating away at their profits.<br><br>competition, market share etc does not equal profits.
        Davewrite
      • Google's strategy, not Microsoft's

        @ anono

        Google's strategy (copied from Sun Microsystems) is indeed to copy competitors (e.g. Microsoft, Apple) and offer the results for free (e.g. Google Apps, Android), but Microsoft have never really used this strategy. Bing, for example, uses an advertising model like Google search, and is a revenue source for Microsoft. It's still loss-making, but if its volume reaches critical mass, it could become very profitable.

        The copy-and-give-away strategy does tend to drive down prices to some extent, but it was never very successful for Sun. In the long run, I doubt it will be successful for Google either. The basic problem is that the profit maximising level of investment for give-away products tends to be much lower than for revenue-generating products, so give-away products tend to be inferior. This is obvious when you compare, for example, OpenOffice with Microsoft Office, or Android and the Android Market with iOS and the App Store. Most customers aren't completely naive, and realise this (especially with experience).
        WilErz
      • RE: Google's first quarter earnings miss projections as expenses spike; Page makes brief appearance

        @Davewrite

        I don't confuse competition with making money nor does my post imply anything of the sort.

        As an aspirational brand, Apple has a lot of freedom in pricing compared to Google's "commoditize everything" approach. Certainly this freedom makes Apple highly profitable but it does not exempt them from competition.

        If Android disappeared today, would Apple sell more iPhones?
        Rich Miles
      • @Rich Miles: Great list.

        Love the list on competing products. Puts things in perspective.
        Bruizer
      • @ Rich Miles The iPod and Competition

        @Rich Miles

        what I mean by competition and money is that a list like yours can misled some (perhaps not you) that "hey Apple has big trouble, look at all that competition"

        My point is that not all competitors are equal, you have to see who is making money and how much to really judge 'competition'.

        Look at the iPod: a few years ago someone could have a list like this:

        IPod competition : toshiba, Sony, San Disk, iRiver, Creative Nomad, Phillips, Zune, Samsung, etc etc.

        a casual reader would have said " why iPod is in trouble. Massive competition".

        But if you study the PROFITS it would be clear the competition isn't really strong. Most of the competitors are now dead or dying and Actually last quarter iPod actually INCREASED it's market share.
        Davewrite
      • RE: Google's first quarter earnings miss projections as expenses spike; Page makes brief appearance

        @Davewrite<br><br>I understand your frustration. I am amazed at how emotionally attached people are to these mega corporations.<br><br>My personal opinion is that the way things stand now, Apple has the strongest portfolio and the most potential. Why? Unshakeable brand loyalty. I don't mean to imply that Apple puts out poor products. Far from it. I mean that Apple defines product classes. iPods are synonymous with PMPs, iPhones with smart phones, and iPads with tablets. Apple didn't create any of these verticals, but they sure made them profitable. People won't be in the market for tablets anytime soon but they are buying iPads like crazy. You know the one with the wifi and the GBs. :) <br><br>Microsoft has the same clout in the enterprise world. Need some cash? Spit out another version of Office or Sharepoint or Windows or ... Kinect is the only <i>potentially</i> disruptive consumer facing technology I can think of that hasn't come from Apple in the last 10 years.<br><br>In my opinion, Google has the weakest offering of the three company's. Every one of their products (search being a notable exception) is a half-baked me-too product. They also seem to lack business acumen. From the inception of Google the mindset seems to be get the users and the money will follow. <br><br>Apple and Microsoft consider the viability of a market and build killer products before jumping in. At least in Microsoft's case the user uptake is going to be slower than a similar cheap/free option from Google, but long term it is much more predictable and sustainable.<br><br>I am of the opinion that Microsoft is at an inflection point. I think there is a good chance that 2011 is relatively flat or even down for them, but over the next few years the substantial investments they've made in their products (brought on by substantial competition from Apple and Google) will be rewarded with lots and lots of money. <br><br>I think Apple will continue to ride the wave of success that they've had for the last decade. It's tough for me to gauge whether they will shoot to the moon or plateau. Their mystery data center has some interesting potential.<br><br>I see no compelling reason for Google to go up much further. They will continue to see gains as the overall search market grows, but they haven't put out anything that screams this is the horse I want to back. That said, they also have the most potential to surprise me because who know what those crazy bastards are working on. Maybe they invented cold fusion or faster-than-light propulsion.<br><br>There, now you know where I stand.
        Rich Miles
      • RE: Google's first quarter earnings miss projections as expenses spike; Page makes brief appearance

        @anono
        Android, WP7 and W8 are both going to undercut iOS in price and will likely exceed iOS in quality -- in fact, by most measures Android, at least, already does. Apple has shown very little innovation in the past few years.

        Apple's margins are going to have to come down. They just aren't the unequivocal best any more (not that they really ever were, but it's showing more and more now). It will be very hard for them to maintain their high-pricing advantages.

        Apple have made significant investments in their supply chain, which explains why the iPhone 4 is still probably the highest-tech smartphone overall (there are phones with more horsepower, yes, but not in such a small package) many months after its release, so they will continue to be profitable for a long time. As will Google and MS. But the growth they have seen recently has already come to a halt. Android will undermine iOS and Windows. Bing will undermine Google Search. And Apple will have to spend a *lot* of money to come up with offerings that can match Azure or Google's cloud systems, or they will get left behind the race to the cloud.

        In short, it is going to be messy.
        x I'm tc
  • Not bad overall.

    Android still lagging about 20,000 units/day compared to iOS's stats from 3 months back.

    Google still amazes me they can run their data centers for less than $1 billion/quater given the volume and speed they serve.
    Bruizer
    • Activations statistic is tricky: from the text, it is not clear if these ..

      @Bruizer: ... 350 000 Android activations per day were average for Q1 or are data for now, beginning of Q2 -- with Google, it is usually the latter.

      Anyway, it looks like Google activated no more than like 30 million Andoid devices in Q1.

      Until Apple will post its result, it can not be said for sure how it compares to them, since Q1 is usually way less than Q4. However, there is significant growth in mobile segment -- both media players, smartphones and tablet.
      DDERSSS
    • Just phones...

      @Bruizer If you're just comparing Phones, Android is winning... It will take 2 or 3 quarters before the Tablets are competing but they will get there.
      slickjim