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Google spending cuts profit as mobile competition hits sales
[SAN FRANCISCO] Google Inc is ramping up spending to invest in new technologies and fend off competition on mobile devices, even as its maturing Web-advertising business posted quarterly profit and sales that fell short of estimates.
Fourth-quarter profit, excluding some items, was US$6.88 a share on revenue of US$14.5 billion, Google said in a statement Thursday, compared with analysts' average projections for US$7.11 and US$14.7 billion. Expenses jumped as Google added more staff and real estate, while currency fluctuations dented revenue.
While Facebook Inc and other Internet companies are seeking to lure away users and advertisers on tablets and smartphones, Google's shares were buoyed Friday amid signs of strength in the search provider's main businesses and optimism that the company will use its cash pile to enter new markets to secure future growth.
"They didn't do anything that was dramatically inconsistent with what they've been doing," said Brian Wieser, an analyst at Pivotal Research Group LLC. "You've got top-line growth that overall is reasonably solid and you have margin erosion, largely due to diversification." Foreign currency fluctuations also weighed on results. Google said total revenue would have been higher by US$541 million from the prior quarter without the impact of a stronger dollar, which reduces the amount of overseas income that can be counted back home. Marketers also paid less for mobile ads, driving down the average price of spots by 3 per cent in the quarter.
Chief Executive Officer Larry Page stepped up spending, as Google invests in areas outside of the company's main search-ad business, from high-speed Internet service and driverless cars to digital-payments systems and Web-linked glasses.
Operating expenses, which include engineering and sales staff, reached US$6.78 billion in the fourth quarter, a 35 per cent increase from a year earlier. That compares with quarterly operating expenses of US$5.5 billion at Apple Inc, whose revenue was more than five times greater than Google's in the same period.
"In many ways, 2014 was a year of significant investment growth," Patrick Pichette, chief financial officer, said on a conference call. "We'll continue to seek a healthy balance between growth and discipline." While Pichette said there are many promising areas for future growth, he also pointed to Glass as an example of how the company can also be ready to pull back on a project.
"In those situations where they don't have the impact we hope for, we do make the tough calls," the CFO said.
Pichette also said in the conferce call that Google would be willing to "throw a little back" when the company reached a limit on how much it could invest in operations.
"We do review this issue on a regular basis," Pichette said when asked whether Google was closer to returning cash to shareholders. "I just have nothing to announce today." Fourth-quarter net income rose 41 per cent to US$4.76 billion, or US$6.91 a share, from US$3.38 billion, or US$4.95, a year earlier.
Revenue from Google's own sites, including the key search engine, rose 18 per cent to US$12.4 billion. Other revenue, which includes the mobile Play app store and hardware such as the Chromecast streaming device, rose 19 percent in the quarter compared with a 50 per cent gain in the prior period.
Google's share of the online-ad market is coming under pressure as more users spend time on smartphones and tablets. The company, which has introduced services encouraging marketers to use its mobile features, saw its share of global mobile-ad revenue decline to 41 per cent in 2014, from 47 per cent in 2013, while Facebook's rose to 18 per cent from 17 per cent, according to EMarketer Inc.
"Mobile is a big concern of investors," said Robert Peck, an analyst at SunTrust Robinson Humphrey Inc, who has a buy rating on the stock. "What happens to Google's dominance as it gets more competition as the world goes mobile?"