Thursday 22 February 2018

Google misses some estimates on costs of new markets

Brian Womack

Google, owner of the world’s most popular Internet search engine, reported profit that missed some analysts’ estimates, underscoring the cost of pursuing growth in new markets.

First-quarter net income rose 37pc to $1.96bn from $1.42bn a year earlier the company said yesterday in a statement.

Excluding some costs, profit was $6.76 a share. Estimates compiled by Bloomberg were as high as $6.91.

The company increased hiring, made acquisitions and boosted capital spending as it expanded its display ad and wireless businesses.

Google’s costs rose 18pc, double the increase in the fourth quarter. The company failed to meet the expectations set this week by Intel, a barometer of technology spending, which forecast a surge in sales.

“It wasn’t a knock-your-socks-off quarter,” said Ben Schachter, an analyst at Broadpoint AmTech Inc in San Francisco, who recommends buying Google shares. “The market had been doing better and people expected better.”

Google fell as much as 5.3pc yesterday in after-hours trading to $563.50. The shares gained $6.30 to $595.30 during regular trading on the Nasdaq Stock Market.

Google fell 4.1pc to the equivalent of $570.37 at 10.08am in German trading.

Aaron Kessler, an analyst at Kaufman Brothers LP in San Francisco, said that to appease investors, Google needed to post profit excluding some items of $6.90 to $7 a share.

Excluding revenue passed on to partner sites, sales were $5.06bn. That compared with the average $4.95bn prediction. Estimates ranged as high as $5.12bn.

Increased hiring

Google added almost 800 employees during the quarter, compared with fewer than 200 in the fourth quarter. It now has a workforce of more than 20,000.

“Posturing that they would continue to ramp up gave investors a bit of a pause,” said Andy Miedler, an analyst at Edward Jones in St Louis, who recommends the stock and doesn’t own it.

Patrick Pichette, Google’s chief financial officer, said the company has a “growth agenda” and must hire to ensure it can address markets such as display advertising and mobile.

“We’re bottlenecked on engineers,” Pichette said in an interview yesterday. “We don’t have enough engineers to do all the coding and all the innovation we want.”

That doesn’t mean the company is going to be less disciplined in its spending, he said, adding that Google has been telling investors it was going to increase hiring.

“You have to stay frugal,” said Pichette, who pointed to the 23pc sales growth last quarter from a year earlier.

Google, which announced six acquisitions this year, said capital spending rose 8.1pc to $239m.

Search share

While Google has maintained a lead in search, its market share fell to 65.1pc in March from 65.5pc a month earlier, according to ComScore Inc in Virginia. That’s the biggest monthly decline since January of last year.

Microsoft, benefiting from its new Bing search engine, had 11.7pc, up from 11.5pc. Yahoo! reversed six months of declines and posted market share of 16.9pc, up from 16.8pc. The two companies signed a 10-year search agreement last year to compete with Google.

The number of paid clicks rose about 15pc during the quarter from a year earlier and about 5pc from the previous quarter, Google said.

The cost per click climbed about 7pc from the year-ago period, though fell about 4pc from the fourth quarter.

Nexus One

Google invested in its mobile-phone business during the quarter. In January, it released its Nexus One phone, which runs on the company’s Android software.

Some 6.8 million Android phones were sold last year, accounting for 3.9pc of the global market, according to researcher Gartner Inc.

Last month, Google shuttered its mainland China search site and redirected users to its Hong Kong site -- a decision it made after the company’s systems endured cyber attacks.

Google competes with Baidu Inc in China -- the world’s largest Internet market.

“Even though Google continues to serve mainland China via its HK site, we believe this strategy is not sustainable longer term, and expect advertisers to defect to Baidu over time,” said Youssef Squali, an analyst at Jefferies & Co in New York.

Google will continue to sell ads in China and there are lots of opportunities there, Pichette said on the earnings call.


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