Google Shareholders Should Appreciate CFO Pichette's Cost Cutting Measures

Google's (GOOG) investors quickly cheered Tuesday's earnings out of the gate in the after-hours, bidding the shares up to $410 -- they've since fallen back to $385. We'll see what they do in the broader session.

The reason for the fall back in share price? After initial investor euphoria over a top and bottom line beat and increase over a year ago, some cautious macro comments from Eric Schmidt and perhaps the announcement of the moving on of one-time sales rock star, Omid Kordestani, gave investors pause. Still, the results are impressive.

What GOOG shareholders should be thankful for is the hatchet the company took to expenses and cost rationalization. Trimming jobs and other expenses -- previously not a GOOG strength -- helped profit climb almost 9% from a year ago to $1.42B. $110MM here, $110MM there: it starts to add up over time.

Shareholders should directly thank Patrick Pichette, the new CFO who came over last summer after cooly and calmly driving costs out of Bell Canada in his previous stint. Pichette was clearly brought in with a mandate -- and he's delivering.

And if you want to thank the person for bringing in Pichette, thank Shona Brown, GOOG's SVP of Business Ops. Brown -- a Canadian like Pichette -- also was a McKinsey consultant in her former life, just like him.

Disclosure: No positions

Comments

[Frodar:]

I would argue that cost cutting still isn't really a Google strength. They spend huge amounts of money. Their core revenue is supported by, perhaps, a quarter of their workforce. What do the rest of the more than 20,000 employees do? At one point, Google had more than 5,000 people working in research and development. But their new product introductions have generally been incredibly weak. Quick! What was the last successful product Google released? Certainly not Google Base, or their pathetic second life knock-off. And the radio ads business? Shut down. Their phone was actually launched a while ago, and yet you never hear a thing about it. The iPhone gets more press in a day than Android and the G-phone get in a month.

Google cut the number of people working for Google by nearly 10,000. That is cost cutting. But it was from such a grossly inflated headcount that they didn't even need to make meaningful cuts in their full time employee base. And they still have at least 10,000 employees who aren't adding value.

I suppose the good news is that their core business is going to keep growing no matter what they do, because Yahoo and Microsoft are pathetic competition at best. And they can go back to the cost cutting well for years to keep Wall Street happy. It's only a shame they don't cut the fat now, and figure out how to deploy those thousands of employees in some manner that lets them grow beyond search.

Apr 23 09:05 AM

[LA Tech:]

Google's main problem is single digit revenue growth for the next several quarters.

No amount of cost cutting can overcome the lack of 50-60-70-80 percent revenue growth in the past.

Apr 23 10:50 AM

[Embarcadero:]

How is it that you know that there are 10K google employees who "aren't adding value"? Please share.

Keep in mind that Google's real innovation is the ability to monetize Search. I'm assuming that many of the people who are working in R and D are working on things that their customers - not their web users - see and use every day.

Their rate of growth has slowed. But in this market, they're clearly doing very, very well.

Apr 23 11:52 AM

[Frodar:]

Hi Embarcadero,

Your comment answers itself. "Google's real innovation is the ability to monetize search." At the end of last year, Google had more than 20,000 employees. Although they don't disclose it in corporate filings, other reports have said they had nearly 10,000 contractors working for them as well. How many are working on the core search engine and the monetization of that? You might be able to argue that they have a few hundred engineers on the core search and monetization tools. 250 engineers would be a ton of engineering talent for "the ability to monetize search."

But let's be ludicrous, and say they have 1,000 engineers on the job. And then let's say they have 2,000 operations people. And let's even say that it takes another 2,000 sales people and 2,000 marketing people. Those are armies of people, especially given Google's famous high standards for talent. So now we're at 7,000 people. Add in 500 accountants and 1000 cooks and masseuses. What am I missing? Are we at 10,000 people yet?

But of course, the core business is really a few thousand people in total. You can't argue that it takes 5,000 people, much less 10,000 or 20,000.

My real issue, though, is that the "real innovation" you mention made all it's big strides back in 2002 and 2003. Now that it's 2009, what are they doing? According to the SEC, they had 7,254 people working in research and development on December 31, 2008. Holy cow! The laurels they are resting on were developed before most of those people were even hired.

My guess is that if you took the most innovative companies in Silicon Valley, companies like Facebook, LinkedIn, and Twitter, you wouldn't be able total up to one quarter the R+D headcount Google has. Wasn't YouTube something like 35 people in total?

So, for the hundreds of millions of dollars that Google spends on research and development, can you come up with a better "real innovation" than the search monetization scheme that John Batelle points out they stole from Overture? What is the best NEW thing Google has invented in the last three years?

Frodar


On Apr 23 11:52 AM Embarcadero wrote:

> How is it that you know that there are 10K google employees who "aren't
> adding value"? Please share.
>
> Keep in mind that Google's real innovation is the ability to monetize
> Search. I'm assuming that many of the people who are working in R
> and D are working on things that their customers - not their web
> users - see and use every day.
>
> Their rate of growth has slowed. But in this market, they're clearly
> doing very, very well.

Apr 23 01:32 PM

[jerry w.:]

goog is still a fantastic buy. It does nothing but improve constantly. Why doesnt its price reflect this. what is keeping people from buying it?

Apr 23 01:52 PM

[Frodar:]

I totally agree with that. I think Goog is a great buy for a few reasons. One is that more and more advertising is moving on-line and they're gaining market share at the same time. The management may not have figured out how to grow beyond search, but search is taking care of itself.

The more important thing for me is that Google is an excellent hedge against inflation and currency collapses. Because the prices are set by auction, they don't need to raise their prices if inflation takes off. While some industries get creamed by rising prices, these guys don't even have to take any action to adjust.

Besides that, as I mentioned before, they can still cut thousands and thousands of jobs before they even come close to anyone who is actually doing something useful there.

Apr 23 05:31 PM