Last updated: April 15, 2011 7:00 pm

Google shares hit by rising cost fears

A record hiring binge and big spending on marketing pushed Google’s costs up sharply in the first quarter, overshadowing a revival of growth in its advertising revenues.

Shares in the internet search group fell by 6 per cent on Friday to $542.62 as investors worried that it was facing a deterioration in its underlying cost structure as it tried to maintain growth.

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But in a call with investors,company executives stressed that the higher costs were part of an expansion plan set in train 18 months ago, reflecting a belief in new markets such as display advertising, mobile web access and online video.

“We are building multibillion-dollar businesses and now is the time to invest,” said Patrick Pichette, chief financial officer. “The discipline of the company has not changed – we’re just really bullish on our prospects.”

He denied that the company was taking on bigger bets as a result of the leadership change in which co-founder Larry Page took over as chief executive officer this month. While Mr Page has pressed for ambitious, long-term growth, Mr Pichette said Google had always been set on creating services that could affect “billions of people”.

Operating costs jumped to $2.84bn in the first quarter of this year, an increase of 54 per cent from the year before, with higher employee expenses making up a big part of the increase. Global headcount rose a record 1,900 in the period, to reach 26,316. A 10 per cent across-the-board pay rise in the final months of last year added to costs.

Google also boosted marketing spending, although executives said this was narrowly targeted on areas of growth, including promoting its Chrome browser and acquiring new advertisers.

With advertising rebounding, revenues in the first quarter reached $8.58bn, up 27 per cent against growth of 23 per cent a year ago and ahead of most analysts’ expectations. After the traffic acquisition costs Google pays to other websites, net revenues reached $6.54bn, compared with the $6.32bn expected.

But the jump in costs left profits below expectations, with pro forma earnings per share – the measure Wall Street uses to assess the company – reaching $8.08, against the $8.13 analysts had forecast. That compared with $6.76 a year before. Net income rose 18 per cent.

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