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Google Earnings: Still Crawling Toward Revenue Diversity

Google (GOOG) released its third quarter earnings today and showed that the company keeps marching ahead on its own schedule. Although non-ad revenues grew some, even after dropping the expensive Nexus One smartphone, Google remains a business completely in thrall to the advertising model.

At $7.3 billion, quarterly revenue was up 22.6 percent year-over-year. Revenue for the first nine months of the year was 23 percent up from 2009. Total expenses for the first nine months were up roughly 21 percent, so, as you'd expect, net income was also up.

Of the total expenses, R&D for the first nine months climbed by 16.1 percent, and so lagged behind other spending. R&D is a big line item for Google, and unlike some companies like HP (HPQ), the amount it spends as a percentage of revenue continues to climb. In the first nine months of 2009, it was 12.4 percent. This year, it's 13 percent.

This company spends on R&D like few others. Apple's R&D as a percentage of revenue for the first nine months of the current fiscal year was 2.9 percent. HP is in that range. Microsoft (MSFT), on the other hand, hit 13.9 percent in its FY 2010. But that level of investment is highly unusual -- and, as Apple demonstrates, not necessarily needed.

Of the ad revenue, if you compare the first nine months of 2009 and 2010, Google Network ads as a percentage of total ad revenue changed by only 0.1 percent, which is important for the company as it must balance relationships with other companies to the higher margins it sees through ads on its own sites.

You might think that with all the money Google pours into R&D, more revenue would start coming from non-ad sources. And more did, during the first nine months of the year ... by a hair. In 2009, non-ad revenues were 3.3 percent of the total. In 2001, they were 3.9 percent. It's a jump, but remember, that includes the 7 months during which Google sold the Nexus One. Without something new to take the place of the Nexus One, I'd expect ad revenue to again move as a percentage of total revenue closer to 97 percent.

For all the money it puts into R&D, things don't change much there. The reason, as I've suggested before, is that the company's process for bringing new products and services to market is badly flawed.


Currency image: user TACLUDA, site standard license. Photo editing: Erik Sherman.