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Summary:

Google spent just $452 million on equipment for its data centers, networks and other infrastructure in the third quarter, the lowest level since the first quarter of 2006, when Google spent $345 million.

Like Jefferies & Co. analyst Youssef Squali and Data Center Knowledge’s Rich Miller, I was surprised by the big dip in Google’s capital expenditures that the company revealed when it reported third-quarter earnings yesterday. At $452 million, this was the lowest spending on equipment for its data centers, networks and other infrastructure since the first quarter of 2006, when Google spent $345 million.

What was more shocking was that the capex as percentage of revenues just tanked, falling to 7.6 percent from 13.1 percent in the third quarter of 2007. Wall Street must have rejoiced at how stingy Google was being, but the fact remains that infrastructure is a strategic advantage for Google, and spending must continue.

Google’s management team said as much in a conference call with analysts. “We are going to continue to invest in capex, so we have no plans of slowing down,” said Chief Financial Officer Patrick Pichette, who went on to attribute the dip to data center buildouts being lumpy. “We are obviously getting better at it, so with efficiencies every extra unit of capacity is cheaper for us, so we are going to benefit back.”

According to Data Center Knowledge’s Miller, Google is done building out the first phase of its data centers in Lenoir, N.C., and Goose Creek, S.C.

  2005 2006 2007 2008
Capital Expenditure ($ Billions) 0.8 1.9 2.4 1.99*
Gross Revenue ($ Billions) 6.1 10.6 16.6 16.1*
CapEx as percentage of Gross Revenue 14% 18% 14% 12.4%*

* Data for the first three quarters of 2008.

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  2. I forgot to underline that I back the comment by Patrick Pichette. We could buy some very cost-effective servers today compared with earlier years. I doubt that Google infrastructure are lacking behind in hardware. (400-odd mio? Awesome!)

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  3. I think this is an interesting point. The drop in capex could be a precursor to slower growth. I note that Yahoo had a significant drop in capex as a % of revenues during Terry Semel’s ill-fated cost cutting efforts back in 2004-2007.

    I’m not saying that Google will go the way of Yahoo, just that this might be indicative of management’s outlook for growth.

    I am dubious of the idea that Google is simply spending more efficiently. Amazon showed higher capex as a % of revenues over the last three years, for example, as they built out their EC2 and S3 initiatives.

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  4. I’m no expert, but I assume this little blip in capital expenditure must be some accounting tactic for the sake of PR. Same thing the whores did in Unforgiven when they pricked their fingers with a little needle to get a couple drops of blood to blush their cheeks with. The girls needed to look pretty but resources were scant.

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  5. Let’s not also forget that there are some huge economies of scale that GOOG can leverage. These past big CAPEX investments should now allow GOOG to leverage it for X growth.

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  6. [...] one has to look at their other moves such as plans to slash 10,000 or so of their contractors, slowing cap-ex investments and killing off projects. These point to tough times for the company that has lived a lush life so [...]

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