Google’s Google’s Q1 earnings are out, and the verdict isn’t good. While its revenues and profits are up by 27% and 15% respectively, its earnings per share didn’t meet Wall Street expectations. Google’s stock price has taken a beating in after hours trading as a result.
That’s not the only thing hidden in Google’s earnings, though. The numbers tell a deeper story about the search giant’s priorities and its biggest challenges. There are surprising jumps in Google’s R&D, stock-based compensation and marketing expenses. Why are all of these expenses on the rise?
To answer that question, let’s dive into the numbers. Here are some takeaways from Google’s Q1 earnings:
1. The talent wars are taking their toll on Google
One of the biggest increases in Google’s Q1 financials was the rise in stock-based compensation expenses. In Q1 2010, Google doled out $291 million in stock options and bonuses. In Q1 2011, that number rose 48% to $432 million.
We know that Google’s been working overtime to retain its current employees, as well as expand its current workforce. Last year, Google gave everyone a 10% raise and a $1,000 bonus. But that hasn’t been enough to stop Facebook, Twitter and others from raiding its talent. Google’s even reportedly making massive counteroffers of $50+ million to keep its top employees from jumping ship.
The lack of engineers to meet the high demand in Silicon Valley has created a war for talent between the world’s top tech companies and the thousands of startups in the Bay Area. The result is that Google has to pay more for talent, and it’s going to get worse.
Prediction: the $432 million it spent in Q1 will be nothing compared to what it spends in Q4 this year.
2. R&D is way up, but why?
Google spent a lot of money on R&D this quarter. In Q1 2010, Google spent $818 million on R&D ($627 million if you remove stock-based compensation). In Q1 2011, that number jumped by a whopping $408 million to $1.23 billion ($989 million sans stock-based compensation).
So what caused the dramatic rise in research and development? While Google declined to break down its R&D line items, we assume it looks something like this:
1) Social
2) Social
3) Social
It’s no secret Google has a poor track record on social media. While YouTube has turned into a strong property, Google Buzz was one of 2010′s biggest tech flops. It’s been developing products like +1 and advanced social search, but none of these projects have been enough to fight off the Facebook threat.
Social media success is so important to the company that bonuses are now tied to Google’s social media success.
We’re sure there are other factors contributing to this quarter’s inflated R&D budget (Android, Chrome), but we bet social is a major contributing factor.
3. Google’s flexing its marketing muscle
In Q1 2006, Google spent $191 million on sales and marketing. In Q1 2010, that number was $607 million. In Q1 2011, that number skyrocketed to $1.03 billion –that’s a shocking increase of 69% in just one year.
What is Google spending all that money on? During today’s earning call, CFO Patrick Pichette defended the $1+ billion rise in operational expenses. One thing he pointed out: Google’s increased spending has made Android a dominant mobile platform. 350,000 Android devices are now being activated every day. There’s a reason why people are predicting Android could own half of the smartphone market by 2015.
We’ve seen an increase in Google’s marketing efforts over the last few years, and that’s reflected in the spending. Android has been the big beneficiary, but Chrome has gotten some the spotlight as well. SVP Jeff Huber said on today’s call that 40% of Chrome’s 120 million users came from its marketing efforts.
For years, Google spurned traditional marketing, but in competitive markets like search and mobile, it simply needed to pony up the cash to get the word out about its products. The investment seems to be paying off so far.
4. Google’s in very good shape
Google’s stock may be taking a beating right now (the stock is down ~5.5% in after hours trading), but overall Google’s doing just fine. Revenue is up 27% and profits are up 15%, despite the big increase in spending. Those are solid metrics that point in the right direction.
The big increase in operational spending is something to worry about, but most of those investments are in marketing, R&D and personnel — the types of investments that typically pay off through better products. It would be a different story if the increases were coming from operational inefficiencies or a bloated staff, but neither seem to be the case.
The bottom line is that Google’s revenues are growing, and that trend doesn’t show any sign of changing.
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