Globe & Mail: An innovative balancing act
Karim Bardeesy
From Thursday's Globe and Mail Last updated on Thursday, Aug. 27, 2009 07:05AM EDT
Tapping on a white cellphone, Patrick Pichette shows off Google's latest marvel.
"There's my wife," he says as a Google map scrolls. A tiny image pinpoints his vacationing spouse, down to the neighbourhood block in suburban Montreal. "And there's my daughter." He flicks the phone's mini-trackball. "Isn't that cool?"
A year ago, the 45-year-old Montreal native moved his family to Silicon Valley to become chief financial officer of Google Inc. But the company's Latitude software application, which allows users to track each other's location, isn't simply a useful tool. It's a window into Mr. Pichette's appetite for the kind of innovation that defines Google, and illustrates one of his strongest features as the man who minds the books at the world's largest Internet company.
Google Latitude may be cool, but it isn't a money maker. Nor are most of the new online applications launched by the Mountain View, Calif.-based company, which nevertheless continues to wring huge profits - $2.9-billion (U.S.) in the first six months of 2009 - from its core business of selling advertising around the Web's most popular search engine.
For the first time, Google is grappling with a slowdown: Its revenue grew only 3 per cent in the second quarter. So it falls to Mr. Pichette, the chief financial officer, to keep an eye on the till - still bursting with $19.3-billion in cash - to ensure spending is in line with the new economic environment without smothering its culture of experimentation that could yield the next online sensation.
Observers say his strategic sense and disciplined management have helped cut costs, guiding Google to even better operating margins in a recession and a tough advertising marketplace.
Mr. Pichette plays down his role, repeating the Google mantra that the user experience is what matters, and that company's goal is to organize the world's information. The Google approach, and the team of "hypersmart" colleagues he found there, excites him after seven-year tenure at Bell Canada, which he left as president of operations.
"[I joined] Bell during the Enron time. [There was] a lot of scrutiny around financial matters. So nothing frazzles me," said Mr. Pichette in an interview at Google's Toronto office.
"But I also bring the same innovation that fuels Google. It's a mindset, it's about seeing the world for its possibilities."
Mr. Pichette wasn't the obvious choice to fill the CFO's post, which he took up last August. He was a relative unknown and, perhaps more importantly, didn't fit the image that Google had been projecting to the markets, which put innovation above cost control.
"This whole suggestion that they were bringing in an operating-focused CFO and driving efficiencies made people think, 'Yeah, sure,' " recalled Jeff Rath, an analyst at Canaccord Adams Inc. "It wasn't consistent with the founding mission of the company."
Mr. Pichette's arrival at the Googleplex coincided with some cost-cutting measures. While free massages are still on offer, other perks, such as Tuesday afternoon teas, have been cut. Google went through a round of layoffs, mostly in the sales, recruitment, and marketing departments, and headcount at the end of the second quarter was 19,786, down about 430 from the end of 2008. Google reduced its general and administrative costs to $364-million in the quarter, down from $474-million in the fourth quarter of 2008.
"The company's actions immediately after his hiring suggest he immediately put the screws to what he saw as needless spending," said Eric Jackson, founder of the hedge fund Ironfire Capital LLC. "He saved the company money before there was really investor sentiment calling for that."
Operating profit margins were 29 per cent in the second quarter of 2008, but have averaged 34 per cent in the last two quarters, a performance that has pleased analysts.
It's hard to credit one man with such results, especially given Google's decision-making apparatus: CEO Eric Schmidt and co-founders Mr. Page and Sergey Brin serve as the ruling triumvirate, guided by the powerful operating committee, on which Mr. Pichette sits.
Mr. Pichette won't take credit for any specific cost-cutting achievement. "You just manage responsibly. What we did during the last six to 12 months since I arrived, through dialogue at the operating committee, was to say, 'Let's just be prudent.' But we'll continue to fully fund everything we do."
Google has cut programs such as microblogging project (Jaiku) and product lines such as a radio-ad placement service. At the same time, Mr. Pichette is part of a strategy that is looking diversify Google from text-based advertising driven by search on its own sites, and advertising provided to partner sites. It hopes for growth, and revenue, from mobile (such as its Android software for mobile phones) and applications (including the free word processing and spreadsheet programs Google hopes will draw users away from Microsoft).
Meanwhile, investors are still waiting for results from the last series of investments, including YouTube, which has generated disappointment revenue so far.
Mr. Pichette argues that continued spending on projects and acquisitions without an immediate payoff is worthwhile. "If something came around that was a good fit, we'd buy it," he said. "When you look at Google, it's been about acquiring technologies and teams of smart people."
When it comes to e-commerce, he would like to see Canadian companies embrace Canadians' high rate of Internet usage and move more of their business online. "The average Canadian probably spends 50 hours a month online," he said. "Yet Canadian companies have not matched and followed their arguments, by advertising more online, using search advertising, or e-commerce."
Investment in a downturn is especially important, he argues: "You need to be prepared that when [the economy] picks up, you are already taking off. That's how you win."
And you have to be ready for surprises. Google Latitude, the project that let him find his wife with his phone, grew out of an earlier, cancelled project. As Mr. Pichette begins his second year as CFO, he'll have to decide which new projects that could be good for the Net will also be good for Google's bottom line.
