Google CapEx Falls, Temporarily

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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