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As Google moves beyond search, costs soar

Surfboards lean against a wall at the Google office in Santa Monica, Calif.


Google Inc.'s attempts to draw out its lengthy 13-year reign atop the global high-tech sector's innovation food chain is finally revealing its costs.

As the Mountain View, Calif.-based search giant undertakes an unprecedented hiring binge, and hurls cash at top talent to keep them from defecting to rivals, creeping costs are eroding its reputation for impeccable financial earnings.

On Thursday, Google posted first-quarter results that sailed below analysts' expectations, leading to a 5-per-cent drop in after-hours stock trading, even as the company posted increased profit and revenue.

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Google earned profit of $2.3-billion (U.S.), or $7.04 a share, compared with $1.96-billion and $6.06 for the same period last year. Revenue was up 27 per cent to $8.58-billion. But expenses surged well beyond the gains, to a whopping $2.84-billion, a full $1-billion more than the same quarter last year.

"I'm very, very optimistic about our future," said Google co-founder and new CEO Larry Page.

But investors weren't buying the optimism.

Google is undergoing an intense period of transition, including management turnover and strategic reorganization, marked most recently by a surprise $900-million bid for patents held by the fallen Canadian tech icon Nortel Networks Corp. Mr. Page made that bold move on his first day as CEO, after taking over from veteran Eric Schmidt, who is now handling international government partnerships.

That change already had industry watchers nervous, but after the results came out Thursday, analysts hammered the company's chief financial officer, Patrick Pichette, with questions.

They wanted to know about the increased expenses and Mr. Page's high-level vision for the company. One analyst asked twice whether the company's discipline and focus had shifted with the ascent of Mr. Page - who stopped by only briefly at the beginning of the call.

"No, build great products, and then [apply the]same financial discipline," Mr. Pichette replied.

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A company of Google's burgeoning size - stretching from Web search into mobile operating systems, wired networks and now wireless patents - requires a significant influx of capital and new employees.

As Facebook continues to grow, and the two giants battle it out to become the primary portal through which consumers access the Internet, Google has pledged to hire 6,200 employees in 2011. That beats the 6,000 the company hired in 2007. Google also made 48 acquisitions last year, according to BGC technology analyst Colin Gillis, to a total of roughly $1.3-billion.

"It is reasonable that Google may seek larger-sized targets as it seeks to boost its social efforts," Mr. Gillis wrote in a research report ahead of Google's earnings.

Mr. Page seems willing to make those bets as he tries desperately to replicate the astounding success of Google's Android mobile operating system in the social networking arena - a move that comes after a string of high-profile failures, including Google Wave, which prompted a class-action lawsuit over privacy concerns that was eventually settled.

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