Google Powers Through Q2, But Stock Gets Hammered On Missed Expectations

by Tameka Kee, Jul 18, 2008, 7:00 AM

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Call it the curse of having been an overachiever. Investors hammered Google's stock in after-hours trading on Thursday, following the search giant's second-quarter earnings report.

Despite an increasingly sluggish U.S. economy, Google managed to churn out a net income of $1.25 billion, up 35% year-over-year. Second-quarter revenues (after subtracting traffic acquisition costs) came in at $3.9 billion, some $30 million above the average analyst estimate.

Still, Google's stock tumbled by just over $40--or nearly 8% in the aftermath--because the company missed Wall Street's expectations in terms of earnings per share (EPS). EPS came in at $4.63, and analysts expected $4.74. The company also reported a deceleration in paid clicks and AdSense revenue.

Google's outgoing CFO George Reyes tried to assuage investor concerns during his final earnings call with the company, indicating that Google's lowered earnings and higher expenses were due to a number of non-business or economy-related factors, including costs from its acquisition of DoubleClick and legal fees.

Reyes did acknowledge that aggregate paid clicks and AdSense revenue were both down "marginally" from the previous quarter, although he attributed the deceleration to "typical second quarter seasonality." Still, paid clicks were up almost 20% year-over-year, while AdSense revenue was up 22%.

Sergey Brin, Google's co-founder and president of technology, addressed the downward trend in clicks and AdSense revenue indirectly, noting that there was evidence that the ad team had been "more aggressive than we ought to have been" with making adjustments like reducing ad volume and coverage in past quarters.

Meanwhile, Hal Varian, Google's chief economist, assured analysts that there was growth in search volume and advertiser spend across verticals, despite mounting economic pressure both in the U.S. and abroad. "Query growth year-over-year has been positive," Varian said, even for troubled sectors like automotive, real estate and travel.

Varian did admit that Google was seeing some softness in sub-sectors like home finance, but that other advertisers were picking up the slack--and causing bid prices to rise accordingly. "Sometimes, we do see them compete aggressively for a smaller set of consumers," Varian said. He added that the only way Google's core business would grind to a halt, even amidst widespread financial hardship, was if "people stopped searching for things."

The search giant's top brass also touted positive benefits with mobile search (and ads), the Enterprise apps business and the development of a more integrated ad management platform. For example, phones featuring Google's long-awaited Android mobile interface are slated to roll out within the next six months. And according to Jonathan Rosenberg, Google's senior vice president of product management, the company has begun investing in third-party developer apps for Android, like Android Scan, a barcode scanner that allows mobile users to get product, pricing and store location info instantly. "Imagine the value of an ad in that scenario," Rosenberg said.

Brin noted that Google's suite of Web-based applications for enterprises--including Gmail and Google Docs--had been picked up by organizations like GE and U.K. media giant Telegraph Media Group.

And Omid Kordestani, Google's senior vice president of global sales and business development, noted that the company was moving forward with its plan of offering advertisers a one-stop advertising shop. "A recent campaign with Foot Locker utilized YouTube, search and content ads, including MySpace and Gadget ads, as well as print and audio," he said. "We're working toward rolling out a broader, more integrated platform."

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