Google Profit Misses Estimates on Hiring, Marketing Costs; Shares Decline

Google Inc. (GOOG), the largest Internet- search company, reported profit that missed estimates after spending more on hiring and marketing amid mounting competition with Facebook Inc. and Apple Inc. (AAPL) The shares fell 5.2 percent.

First-quarter net income climbed 18 percent to $2.3 billion, or $7.04 a share, from $1.96 billion, or $6.06, a year earlier, the company said on its website today. Profit excluding some items was $8.08 a share, below the average $8.12 analyst estimate compiled by Bloomberg.

Larry Page, who became chief executive officer last week, is using a hiring spree to go after display ads and the mobile market. Google announced plans in January to add 6,000 employees this year and raise nonexecutive salaries 10 percent. At the same time, he’s defending Google against regulatory scrutiny in the U.S. and Europe for its grip on the search industry.

“You have to ask, ‘Are they going to be spending efficiently or are they going to be wasting money wantonly?’” said Colin Gillis, an analyst at BGC Partners LP in New York, who has a “hold” rating on the shares. “Larry Page has made it clear that he is returning the company to investment mode and he is chasing after big opportunities.”

Stock Falls

Google, based in Mountain View, California, declined $30.21 to $548.30 in late trading. The shares, down 2.6 percent this year, had risen $2.23 to $578.51 at 4 p.m. New York time on the Nasdaq Stock Market.

Excluding revenue passed on to partner sites, sales rose 29 percent to $6.54 billion, topping the $6.32 billion average of estimates. Still, that growth was dwarfed by a 54 percent jump in operating expenses.

“Business is doing really well from a top-line perspective,” said Heath Terry, an analyst at Canaccord Genuity Inc. in New York. The question is whether investing in new areas, such as mobile services, social networking and display ads, will lead to “permanently depressed margins,” he said.

The company is relying on its Android operating system and last year’s acquisition of AdMob Inc. to tackle the mobile market, putting it in closer competition with Apple. Meanwhile, Google is increasingly squaring off against Facebook in display advertising -- the banners and videos that appear on websites.

Google had 26,316 employees at the end of the first quarter, up 7.9 percent from 24,400 in December. Research and development costs rose 50 percent from a year earlier, while sales and marketing climbed 69 percent.

Antitrust Review?

The company faces deepening challenges on the regulatory front. The U.S. Federal Trade Commission is weighing a broad antitrust probe, people familiar with the matter said this month. Also, the European Commission and Texas Attorney General Greg Abbott have begun investigations into whether Google is skewing its search results to favor its own businesses over competitors’ websites.

Page, a Google co-founder, took the reins from Eric Schmidt, who became executive chairman and is now focusing on external affairs and government relations.

“We’ve really hit the ground running,” Page, 38, said today on a conference call. “I’m tremendously excited about all of the things that lay before us as a company.”

In his first week on the job, Page promoted seven of his managers to senior executive positions, including Andy Rubin, who heads up mobile efforts, and Vic Gundotra, who is in charge of social initiatives, according to a person briefed on the changes. The executives will report directly to Page, the person said.

Page’s changes are designed to streamline engineering and product development, placing a single manager in charge of each product group, said Chris Gaither, a company spokesman. Page said in January that the company needs to maintain its pace as Google becomes larger.

“Google’s decision-making process has slowed over the years,” said Jordan Rohan, an analyst at Stifel, Nicolaus & Co. in New York. He recommends buying the stock, which he doesn’t own himself. “He’s trying to attack that decision paralysis.”

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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