Google Grows (Up?) Amidst Headaches

Google (NASDAQ:GOOG) seems to be facing some headaches despite an upbeat quarter. The company’s attempts to expand its China operations met with problems after a cyber attack in December of last year. Also, some new applications are the subject of government concerns on user privacy. Such are the realities of growing up.

Q1 revenues grew 24% over the year to $5.06 billion. Network revenues grew 24% over the year and outpaced Google-owned sites revenue growth of 20% over the year. The company reported EPS of $6.76, recording growth of 31% over the year. The market was expecting revenues of $4.95 billion with EPS of $6.60.

While search remained the core business, Google is troubled by the absence of growth in its U.S. market share. The company has maintained a 65% share of U.S. online searches since October of last year. In March of this year, its U.S. market share fell 0.4% as both Yahoo! and Microsoft grew a minor 0.1% and 0.2% to 16.9% and 11.7% respectively. Although this growth was not sufficient to challenge Google’s search dominance, it is perhaps not surprising that Google is developing sources of revenue beyond search by building on its display, video, and mobile ad businesses.

The Android platform, which now boasts of running on 34 devices with 38,000 applications, is already expanding rapidly. Google claims to have an average of 60,000 Android devices activated and sold daily. According to comScore, Android’s share of the U.S. smartphone market grew to 9% as of February, but it is still a far cry from the iPhone’s 67% mobile Web browsing share. To up the competition, Google launched Nexus One, its mobile phone, this quarter. While Google declined to disclose the number of devices sold so far, management said that it was impressed with the phone’s progress. I am not sure if I am, though.

The mobile ad market is a rapidly growing market which Google is also addressing. According to JPMorgan research, the U.S. mobile advertising market grew 80% over the year to $400 million last year. Google is already in talks with AdMob, a leader in the mobile ad market. AdMob generates $100 million in revenues annually, and Google is looking at paying $750 million for the acquisition. However, the deal is currently being debated with the U.S. Federal Trade Commission for antitrust clearance. Apple also realizes the importance of the market and recently launched its iAd business to compete with AdMob.

During the quarter, Google hired 786 workers, the most in the past two years, to work on the development of other new products. However, some of the company’s recent product launches have come under severe criticism. Earlier in February, Google launched Google Buzz, which identifies frequently used Gmail contacts and creates public circles of friends for users. But governments of almost ten nations have expressed their concerns over the flouting of privacy norms, and Google has had to make changes to their application. Another application, StreetView, faced similar issues because the application shows street images of neighborhoods taken through cameras mounted on unmarked cars.

Meanwhile, Google is going strong on its strategy of inorganic growth for the year. It has already acquired five companies since the beginning of the year. The latest acquisition was Plink, a UK-based maker of an Android application for visual search that recognizes and identifies artwork. Google is looking to bring the PlinkArt application to its mobile phone in-house and to build a visual search engine that will work not only for paintings or book covers, but also for “everything you see around you.”

Earlier the company acquired DocVerse, valued at $25 million, which is a startup with software and devices that will allow Google to start blending Microsoft Office’s software into Google Apps. Google also acquired Picnik, an online photo editor, which works directly with online photo libraries to complement the editing capabilities of its Picasa application, and Remail, which developed an e-mail search application for the iPhone. Finally, Google acquired Aardvark, which has a search engine that scans the profiles of people the user has designated as friends and attempts to match their expertise or interests with a query. Analysts expect that Aardvark cost Google $50 million, and Google is looking to use Aardvark to improve its recent Buzz offering.

Google’s plans to expand in China suffered a setback when the company decided to close its Chinese site because of a cyber attack in December last year. Google was already chafing under that country’s strict censorship rules. Google has devised a go- around the problem by moving its Chinese web search to its Hong Kong Web server, where it is not required to self-censor results. But, as per a Beijing-based Internet research firm, “Google’s traffic from users in mainland China has dropped, and its Chinese online search advertising revenues have dropped as well.”

Their stock is trading at $559.53 with a market capitalization of $178 billion. The stock had reached a 52-week high of $629.51 at the beginning of the year.

5yr Google