Peter Kafka

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Google Made a Lot Of Money Last Quarter. It Spent a Lot, Too.

It’s the price of wild, world-changing success: You generate more than $6 billion in revenue, and Wall Street wants to know about a couple pennies worth of earnings.

But that was Google’s fate today: It spent most of its earnings call trying to convince investors not be worried about its earnings of $8.08 a share, which were lower than the $8.13 Wall Street was looking for. Which was really a discussion about Google’s spending.

You can catch some of the back-and-forth in my liveblog of the call at the bottom of this post. But the general gist was this:

  • Random analyst: I see you’re spending a lot on people, or real estate, or whatever. Will that continue?
  • CFO Patrick Pichette: Kind of. Because we’re growing really fast! But don’t worry, we think hard about every penny we spend.

Here’s what didn’t happen on the call: Any kind of interesting discussion with Larry Page, Google’s old/new CEO. Dummies like me thought the company’s new leader might want to spend some time reintroducing himself to Wall Street and the rest of the world, but that’s why we’re dummies and Larry  Page is Google’s CEO, apparently: He’s got better stuff to do.

Wall Street seems okay with this, for now: One analyst did try to ask Google if, you know, things might change in any way now that someone else was running the company. But Pichette told him that there was nothing to see here, and that he should move along, and that was that.

——————————–

Earlier:

Here’s a first look at Google’s Q1 results: Revenues of $6.54 billion and earnings of $8.08 per share

Wall Street was expecting net revenue of $6.32 billion and earnings of $8.13 per share.

It’s not immediately apparent where the miss comes from: Google delivered non-GAAP operating income of $3.23 billion, which is in line with what Wall Street was hoping for. Some investors aren’t waiting for anyone to figure it out, and are selling: GOOG is down 4 percent in after-hours trading.

Google did add nearly 2,000 employees in the first quarter, but it already warned Wall Street that it would be going on a hiring binge by adding more than 6,000 bodies this year.

And Google reminded us that it takes a lot of big, expensive equipment to run a company of this size: It spent $890 million on capex last quarter. “Thee majority of [that] was related to IT infrastructure investments, including data centers, servers, and networking equipment”, the company said in a release, adding that “we expect to continue to make significant capital expenditures.”

Here again is Citigroup analyst Mark Mahaney’s cheatsheet, so you can play along at home:

Google CEO Larry Page will run his first earnings call since he started his new/old gig at 1:30 pm Pacific; I’ll be live blogging then.

LIVEBLOG:

Hrm. Turns out Larry is only going to make a “cameo” at the beginning of today’s call.

He’s discussing management changes. “Everything we told you about last quarter has happened. It’s all working very well, and going as planned.”

Eric’s still working, and traveling, and so is Sergey.

Also, we’ve moved around our org chart.

I’m “very very optimistic about our future.” Also, I’d like to praise Jonathan Rosenberg, who is leaving.

I’m taking off now, but “you’re in very good hands with Patrick.”

Okay, Larry’s gone! Didn’t give the drama critics much to work with there.

So instead, here’s the lineup: CFO Patrick Pichette, as usual, sales boss Nikesh Arora, as usual. And two new faces: Jeff Huber, who runs local and commerce, and Susan Wojcicki, who runs ad products.

Rejoining Pichette’s introductory memo read now.

On to capex: A big chunk of those expenses went to buildings Google bought in Dublin and Paris.

Pichette bragging about product: Android, Chrome, display ads, mobile search. YouTube has developed into a “win-win” platform (for content-makers and watchers)

Okay, now on to Jeff and Susan.

Jeff Huber: Ambitious hiring was “by design,” just like we said it would be. “This is a very good time to invest.”

We look at our booming business and “say to ourselves, who wouldn’t want to invest in this business.”

Starting with search: Launched over 90 quality improvement this quarter. And yes, some sites lost revenue because of one of them. But it’s better for everyone in the long run

Improved social search. Have you seen our +1 button? “This is just the beginning. Lots more” social features coming soon.

Some Android stats. Missed the number of installs per day, but three billion app downloads last quarter.

Chrome: Has 120 million daily users, 40 percent of whom we added this year. Chrome OS going well. Launching on hardware later this year.

And here’s another shout out to Jonathan Rosenberg. “I can assure all of you that he will be missed.”

Here’s Susan Wojcicki: Start with search. Working on figuring out “how to serve the perfect ad with every query.” Which means new ad products.

Now she’s describing them. Better to show than tell, I think, on this stuff. Maybe there will be a link!

On to display. “Very proud” of DoubleClick. Google Display network up 5x since acquisition.

Wojcicki just used the word “bucketed.”

AdExchange volume has tripled in last year. Two-thirds of that being bought via real-time bidding (many ad tech buzz alert bells just went off).

Mobile: Booming. AdMob has over 150 million Android and iOS devices making requests every month.

Okely dokely. Back to Patrick. Much briefer than the Rosenberg-era speeches.

Actually, even better: On to Q&A. I like the Larry Page era!

Q: You’re spending a lot of traffic acquisition, and in general. Should we expect that to continue?

A: Pichette: Some of this is the result of the 10 percent raise we gave everyone. Plus everyone’s benefits get a boost in Q1 as well. And then we have all those new Googlers we just hired. So: Some of this is a one-time cost issue.

In other areas, marketing is up because returns are up. “We don’t expect to slow down our marketing” because it works for customer acquisition and for “key key products” like Chrome.

In other areas, we’re very very disciplined. People show up each quarter to justify their budgets.

Q: More questions about expenses. Also, what’s up with the slides we can’t get to work?

Pichette: We spent more on professional services because we’re spending on the geo product, and we also have a couple of other areas. We do have slightly more legal expenses, and our real estate expansion pushes those costs as well.
Also, here’s why we’re spending on Chrome. Two reasons: Tactical and strategic. When people adopt Chrome, they get to our services right away. (This seems like both answers. Got me.)

Q: Please talk about the way Larry views the company, and how we should think about the way it runs with him.

A: [Wouldn't it be awesome if Larry ran back to the phone to answer this question? No? Anyone? Isn't it weird not to have the CEO on an earnings call?]

Pichette: Nothing’s changed.

Q: Okay, but seriously: Any kind of change? Maybe with the financial model?

A: Pichette: Nope.

[Another question on expenses, which I missed. Apologies.]

[I have CNBC on mute, and I see that they've toted up Larry Page's total word count for the call: 370]

Q: Please talk about social data. How much do you have access to, and how it will affect search results.

A: Jeff Huber: It’s important, but it’s one of many signals we use.

Pichette: Let’s talk about +1 again. It’s very important. We’ll continue to focus on social.

Q: Does Chrome give you additional signals you can use?

A: Huber: Yes, there’s some info you can use via sign in.

Q: More on expenses and social, please.

A: Pichette: It looks like we’re spending a lot, but keep in mind that everyone has to justify their expenditures: Real estate, food, servers, whatever. “Google is growing 25 percent year over year. That’s $2 billion in revenue a year.”

Huber: Yup, still experimenting with social.

Pichette: I know you guys are hung up on expenses. But thanks for letting me talk about it.

Q: Can you talk about how Panda (big algo search change) has changed user behavior/metrics.

Huber: I’ll repeat the stats I talked about earlier in call.

Q: Also, overall display is growing. Are we going to see it from different ad units, or better targeting/data?

A: Wojcicki. We’re at point were you can buy audiences, with much more specific targeting, than in the past. That’s how we get better ads. Also important to note that our display strategy focused on end-to-end platform to enable all buying for all publishers. So that will move more money from offline to online, where users are going.

Q: Is tablet share as important to Google as smartphone share v. PCs?

A: Huber: Tablets growing well. Tablets have interesting properties, because they’re part mobile, part PC. Android has great products coming along, like Honeycomb, which you can see on the Xoom. You’ll see other products coming around. And in ads, advertisers can now target devices. [So, not really an answer]

Q: Now that you’re tying bonus checks to social, how will you measure success?

A: Pichette. Not really going to comment because it’s an internal matter. [sigh]

Q: Search is awesome. But growing concern that “enagagement” is a bigger theme that’s working for some competitors (cough, Facebook). Have you guys thought about pushing engagement more?

A: Pichette: Yes, engagement matters. But look at local, or mobile, or YouTube: All of these businesses are about engagement. So we build those, and we get more engagement. And search today is much more engaged than three years ago.

[Question about content and Chrome that I missed]

Q: On mobile: How much is a mobile user worth per year, and how can that grow over years? Also: What about other big-ticket purchases?

A: Huber: Of course we’re not going to comment on a dollar figure. That said, you can see we’re “very, very excited about” it.

And of course it’s going to become more important over time.

Q: Futile attempt to get you to quantify this in some way?

A: Wojcicki. “It’s going to grow a lot.”

Pichette: “Without any radical effort”–at least with Android. We already said this is a billion dollar annual business. “And we tripped into it. And it’s growing at an amazingly blazing pace….We tripped into a billion dollars.”

On big-ticket purchases: You hear about the stories about the deals we make, but not the ones we pass on. We look at them all the time, and if they make sense we would do it, but we haven’t found one yet. “Big acquisitions can be a massive distraction for Google.” Would have to pass double bar: Strategic/financial test, plus the don’t-screw-up-the-culture test

[Small business question I can't get to right now]

Q: Can you talk about non-search ad business, and how that’s growing? Also, “does Google have a video strategy for non-UGC?”

A: Pichette: We’ve made a number of additions to YouTube team that has a specific focus on that, but nothing to say about that.

Huber: That said, UGC has always been core to YouTube. “We are interested in long-form premium content in the longer term of YouTube.” Also, we bought those guys from Next New Networks!

Wojcicki: We are thinking about best way for advertisers to bid on stuff. In search, for instance, people can bid on cost-per-action target, and we can back that into a cost-per-click target. We can do same with cost-per-impresson.

Q: Can you talk about disruption from Japan. Also for Android, you talked about 350,000 installs per day: please break down between tablets and phones?

A: First reaction to Japan was to help the community rather than optimizing revenue. March results affected, obviously. Japan was important to us, and it continues to be a great-performing market. We asked Hal Varian to look into this, and “Japan is actually a first-world country, and they bounce back very fast.”

On Android: Huber. “Android is relatively early on with tablets.” Which is a non-answer that sounds like “it’s almost all phones” to me.

Q: You say that video inventory is important, but most inventory at YouTube still going adless. What’s up with that?

A: Arora: We care about monetizing all video, not just at YouTube. At YouTube, we do need help from the creative industry to figure out ads that work a bit better with targeting. “We’ve very happy with the progress we’ve been making” and we think ad dollars will move from TV to IP video delivery.

Wrap up from Pichette: Thanks Googlers. You’re great. Also, I want to praise Jonathan Rosenberg, again. He’s on vacation right now. But he’s legendary. And we think he’s great.

OK, we’re done!


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The problem with the Billionaire Savior phase of the newspaper collapse has always been that billionaires don’t tend to like the kind of authority-questioning journalism that upsets the status quo.

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