Google’s Q1 Earnings: Cost Surge Under New CEO Unnerves Wall Street

Google reported $8.6 billion in first-quarter revenue on April 14, a 27% increase compared with Q1 2010. Advertising generated 97% of the company’s revenue in the quarter, with ads on Google sites accounting for 69% of total revenue.

Google Inc's stunning 54 percent spending surge spooked investors already worried its new CEO Larry Page may take his eye off the bottom line to chase revenue growth, driving its shares more than 5 percent lower. Photo: Herkko Hietanen/Flickr

Google has announced its 2011 first quarter financial results, revealing that its revenues increased by 27% — but earnings fell short of Wall Street estimates.

“We had a great quarter with 27% year-over-year revenue growth,” said Patrick Pichette, CFO of Google. “These results demonstrate the value of search and search ads to our users and customers, as well as the extraordinary potential of areas like display and mobile.

“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 added.

Google is helping the economy: the company is hiring so many employees for projects outside its thriving search advertising business that its expenses are growing much faster than its revenue.

Google has committed to hiring at least 6,200 workers this year, the most in its 13-year history. It added more than 1,900 people in the first quarter, a pace that would translate to more than 7,600 for the year. Google ended March with more than 26,300 workers, 28 percent higher than a year ago.

However, the strategy came into sharper focus in Google’s first-quarter earnings report released on Thursday. Higher costs spooked investors who are already nervous about a new CEO who detests Wall Street’s fixation on short-term results.

Google reported revenues of $8.58 billion in the first quarter of 2011, representing a 27% increase over first quarter 2010 revenues of $6.77 billion.

Google-owned sites generated revenues of $5.88 billion, or 69% of total revenues, in the first quarter of 2011. This represents a 32% increase over first quarter 2010 revenues of $4.44 billion.

The company is still mostly global: 53% of its total revenue came from international sources, almost identical to the 52% international revenue it generated in Q1 2010.

The search giant’s profits also increased. Google earned an operating profit of $2.8 billion, a 15% increase from its Q1 2010 earnings ($2.49 billion).

Google’s partner sites generated revenues, through AdSense programs, of $2.43 billion, or 28% of total revenues, in the first quarter of 2011. This represents a 19% increase from first quarter 2010 network revenues of $2.04 billion.

Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 18% over the first quarter of 2010 and increased approximately 4% over the fourth quarter of 2010.

Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 8% over the first quarter of 2010 and decreased approximately 1% over the fourth quarter of 2010.

But all these numbers are overshadowed by significantly higher expenses. Excluding the ad commissions and employee stock compensation, first-quarter expenses rose 44 percent from last year to $3.7 billion

Google shares shed $31.50, or 5.5 percent, to $547.01 in extended trading Thursday after the release of the results. At that price, the stock has now fallen by about 13 percent since the announcement that Schmidt would replace Page.

“Why did Google miss the estimate?” writes Mashable’s Ben Parr. “It’s partly due to increased costs for marketing, hiring and R&D.”

“Research and development spending shot up by 50% to $1.23 billion, marketing costs skyrocketed by 69% to $1.03 billion, and stock-based compensation expenses rose by 48% to $432 million. Those giant bonuses last year are taking their toll on the company’s bottom line.”

“We are doing what we believe is in the interest for the long term for shareholders by building great businesses and great products,” said Google’s Chief Financial Officer Patrick Pichette in an interview. [via The Domains, Mashable and Reuters]

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