Google’s results for Q1 2014 to the end of March saw the company post revenues of US$15.42bn up 19% year on year. Net income was US$3.35bn, up only 3% year on year, reflecting a jump in cost of revenues and operating expenses. Wall Street was disappointed by the results which fell short of expectations. 

The company spent a whopping US$2.35bn on purchases of property and equipment  - production equipment, data-center construction, and real estate purchases - in the first three months of the year, double the US$1.2bn spent in the same period last year. 

Cost of revenues, comprising primarily of data center operational expenses, hardware inventory and content acquisition costs, amortization of acquisition-related intangible assets, increased by 26% to US$2.73bn, while operating expenses jumped 31% to US$5.34bn. CFO Patrick Pichette attributed much of this rise to one-time mergers and acquisitions costs arising from the acquisition of Nest Labs, adding: “Our expenses in Q1 are completely in line with our objectives.” 

In the company’s earnings call with analysts Pichette explained the capital expenditure: “...if you think of the capital expenditure categories, right, data centers first, and data construction then production equipment then all other facilities, it’s kind of like the hierarchy of needs.” 

He said Google is pushing ahead with data center construction because it is more cost effective to have capacity available on standby than to have a spike in demand and not have the capacity to meet it. “It would be a real issue strategically for us, relative to the quite low cost of having the infrastructure in place.”

Most of the concerns expressed by analysts on the earnings call focused on issues that have previously troubled Wall Street, such as lower prices per click on search ads, the impact of new ad formats and the impact on margins of Google’s many new business initiatives.

The figures exclude Q1 financials from the Motorola handset division, which has been treated as a discontinued operation after the division’s sale to Lenovo was agreed in January.