Google’s Investments Pay Off, Fueling Ad Volume Gains

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How YouTube Is Improving Google's Ad Volume

Google Inc.’s strategy of stepping up investments to lure more users and advertisers is paying off, fueling ad volume gains in the latest quarter.

While profit and sales came in just short of estimates, costs were kept well under control, boosting investor confidence and sending Google’s shares up 3.5 percent in extended trading.

Chief Executive Officer Larry Page is pouring money into new initiatives to make sure that people continue to use Google’s search, video and other Internet services instead of going to Facebook Inc., Amazon.com Inc. and other Web destinations. As a result, Google’s advertising volume grew 13 percent, making up for a 7 percent decline in ad prices. The company also revealed faster growth at its YouTube service was masking pricing strength for its core query business.

“The business is fine -- it’s humming along,” said Shyam Patil, an analyst at Wedbush Securities Inc. “It’s still a very strong solid, business. Nothing has changed and they have some very interesting growth drivers.”

Sales, minus revenue passed to partners, rose 14 percent to $13.9 billion in the first quarter, the company said in a statement Thursday. That compared with analysts’ average projection for $14 billion, according to estimates compiled by Bloomberg.

The shares of Mountain View, California-based Google rose to $577.50 in extended trading from $557.46 at the close in New York. The shares are up 5.1 percent this year.

Search Business

Google also kept costs under control, with operating expenses rising 21 percent during the quarter to $6.46 billion, compared with a climb of 35 percent in the prior period.

Earlier this week, Google unveiled a new wireless service called Project Fi. The company also plans to offer a subscriber version of YouTube as soon as this year, letting viewers see clips without having to sit through ads.

First-quarter net income was $3.59 billion, compared with $3.45 billion a year earlier. Excluding some items, profit was $6.57 a share, missing analysts’ average projection for $6.63.

The company also is trying to improve its search experience on smartphones. Earlier this week, Google updated its search service to favor websites that are tailored to mobile devices.

“They still own the search business,” said Martin Pyykkonen, an analyst at Rosenblatt Securities Inc. “But people are finding better ways -- or at least alternative ways -- to find the information that they want. That can be Twitter; that can be your friends on Facebook.”

Mobile Challenge

YouTube is attracting more viewers and expanding globally, boosting the number of ads that users access on its site. More people are accessing Google’s services via smartphones and tablets. Yet, certain ads shown via YouTube don’t generate as much money, Chief Financial Officer Patrick Pichette said on a call with analysts. Core search prices are still rising, he said.

“Both assets -- both YouTube and mobile search -- may have a bit more life, a bit more momentum than maybe we had perceived before the call,” said Josh Olson, an analyst at Edward Jones & Co.

The Google sites business, which includes search and YouTube, saw the average prices decline 13 percent, while volume rose 25 percent.

Also, the rising dollar, which cuts into overseas income, has eroded revenue growth at other technology companies, including Facebook. Excluding hedging gains and assuming constant exchange rates, Google said its first-quarter revenue would have been $795 million higher.

“There was a lot of concern about the impact of currency in the quarter,” said Colin Gillis, an analyst at BGC Partners in New York. “The numbers aren’t as bad as people were expecting.”

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