Google’s profit falls short of expectations

Two weeks after returning as chief executive of Google Inc., the technology giant he co-founded, Larry Page hosted his first earnings conference call with analysts.

Just two minutes later, after underscoring how optimistic he was about Google’s future, Page turned the call over to his executives and revealed little about his plans to run the world’s most profitable Internet company.

His cameo appearance — and the total of 370 words he uttered — made for biting headlines; “What Is Google’s New CEO Thinking? His CFO Will Tell You,” one blog, All Things D, wrote.


But it frustrated investors who were eager to hear what the introverted, media-shy Page, 38, had to say.

“We think the concerns about his leadership are overblown, but this was a missed opportunity to address that issue,” said Jay Welles, analyst with Manning & Napier Advisors, which owns Google shares.

Despite posting a $2.3-billion profit in the first quarter, up 18% from a year earlier, Google shares, which rose less than 1% to close at $578.51 on Thursday, plunged 5.4% to a six-month low of $547 in extended trading after the release of its results. Analysts had expected Google to post even higher earnings.

Google said it missed analyst estimates because it ramped up hiring and spending on marketing as it moved aggressively to counter rising competition from Facebook Inc. and Apple Inc.

The company added nearly 2,000 workers to its payroll during the quarter and spent $890 million on data centers and other capital projects, or more than triple the $239 million it spent in the same period last year.

Google in January said it would grow by more than 6,000 employees this year, the most of any year in its history, and raise employee salaries 10% across the board. Google had 26,316 employees at the end of the first quarter.

The earnings miss marked an inauspicious start for Page’s relationship with Wall Street and fueled anxiety that Page may not be able to meet expectations as consistently as his predecessor, longtime Chief Executive Eric Schmidt.

Google shares are down about 12% since the company announced in late January that Page would take the helm from Schmidt, BGC Partners analyst Colin Gillis said.

“Google is saying, ‘We spent $5.8 billion in the quarter, but we are being efficient with it.’ When you are spending that much money, the concern is that it’s going to be wasted,” Gillis said.

A bright spot for Google: Revenue neared $8.6 billion, a 27% jump from last year. Excluding commissions Google pays to its advertising partners, revenue was $6.5 billion, topping analyst estimates of $6.3 billion. But strong revenue growth wasn’t enough to soothe the rattled nerves of investors who are alarmed by expenses growing at twice the rate of revenue.

John Lutz, senior research analyst with Frost Investment Advisors, which owns Google shares, said this marked the fourth consecutive quarterly decline in margins, a trend that he expects will continue for at least the next several quarters.

“I think most investors were already bracing for a big expense number, but operating expense growth over 50% is still fairly stunning for a company this size,” Lutz said. “It is somewhat unfair to pin all of this on Larry, as the wheels were already in motion for the majority of these expenses before he officially took over as CEO. But investors need to see some discipline on the part of management when it comes to managing expenses.”