Google cost surge sees investors flee

GOOGLE posted a 15 per cent rise in pre-tax profits to $2.89bn (£1.76bn) in its first-quarter results last night, but investor panic over a 34 per cent surge in costs saw its shares dive by 5.4 per cent in after-hours trading.

Costs ballooned to $5.78bn, with sales and marketing spending rising 69 per cent to $1.03bn and operating costs up 20 per cent to $2.94bn.

But the search giant said revenue growth of 27 per cent quarter-on-quarter justified the outlay. “These results demonstrate the value of search and search ads to our users and customers, as well as the extraordinary potential of areas like display and mobile,” said chief financial officer Patrich Pichette.

Paid clicks – ads that generate revenue whenever a user clicks on them – rose 18 per cent, with cost-per-click rising eight per cent.

Google also revealed that it has hired another 2,316 staff in the first-quarter of this year, which in part explains its growth in costs. In addition, it spent $890m on property and equipment, up from $239m in the first-quarter of 2010.

Much of the spending has gone towards an aggressive expansion in Google’s mobile and social networking presence.

“You’ve got expenses growing faster than revenue and some people were caught by surprise by the willingness of the company to spend,” said BGC Partners analyst Colin Gillis.

“But Larry Page has signalled pretty clearly that he is going to be driving up expenses. If the expenses are targeted and result in future revenue streams, then good for Larry. If not, that results in an undisciplined spending approach.”