The market isn't offering much of a warm welcome to Google's returning CEO. Larry Page's more aggressive spending plans seem to have backfired early.
On Thursday, Google reported an 18 percent increase in profits and a 27 percent rise in revenues in the first quarter, thanks, in part, to growth in the Internet advertising industry. Google reported revenues of $8.58 billion. Nevertheless, Google's stock dipped in morning trading.
"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," said Patrick Pichette, Google's CFO. "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."
Spending a Third of Revenues
Pichette's last comment may have been trying to head off criticism on spending plans. Still, Google's operating expenses are drawing objections from stockholders.
Operating expenses in the first quarter were $2.84 billion. That means Google spent 54 percent more on salaries, marketing and research, nearly a third of its quarterly revenue.
Google employed 26,316 full-time employees as of March 31, up from 24,400 on December 31. What's more, Google said it expects to "continue to make significant capital expenditures."
"There was some concern about rumors of employee-retention efforts getting very expensive. In addition, the transition to Page as CEO was a bit of an unknown from an investor perspective," said Greg Sterling, principal analyst at Sterling Market Intelligence.
"He made a kind of 'peekaboo' appearance yesterday at the beginning of the earnings call, almost perfunctory, one might say," Sterling added. "It was a missed opportunity for Page, with investors and financial analysts, to reintroduce himself and instill confidence in his leadership."
But beyond the new CEO and the increased spending, Sterling said there are also
concerns about where new growth will come from. In the conference call, Sterling said Pichette spent a good deal of time trying to argue that there is still a great deal of headroom in search as well as great potential in other markets such as display and mobile advertising.
"I think there's general unease among some investors that Google is confronting a bunch of challenges simultaneously that will inhibit growth -- increasing expenses, formidable competitors like Facebook, maturation of the search market, and, even though it wasn't really discussed, mounting legal and especially antitrust challenges around the world."
To Sterling's point, Microsoft filed a formal complaint at the end of March with the European Commission as part of the regulatory body's ongoing investigation into whether Google has violated European competition law. Microsoft is concerned by "a broadening pattern of conduct aimed at stopping anyone else from creating a competitive alternative."