• by Tameka Kee , July 20, 2007

Google posted strong second-quarter numbers on Thursday with revenues of $3.8 billion--a 6% increase from the first quarter and a 58% increase year-over-year. The search giant shared some 30% of that advertising revenue with distribution partners, paying out just over $1 billion in Traffic Acquisition Costs (TAC).

Google's operating expenses also increased in the quarter, up 5% to just over $1.2 billion. About half of those expenses came from payroll, with CEO Eric Schmidt admitting during the company's conference call that in hiring more than 1,500 new employees, Google had "exceeded the headcount" allotted in the expense plan for the quarter.

Although Schmidt added that the company would be "watching this closely" going forward, both he and George Reyes, Google's senior vice president and chief financial officer, defended the additions to the global sales, marketing and engineering teams as the cost of doing business.

In total, six members of Google's executive management team participated during the call--Schmidt and Reyes; co-founders Larry Page and Sergey Brin; Omid Kordestani, the senior vice president of global sales and business development; and Jonathan Rosenberg, the senior vice president of product management--and they faced questions about pending legal issues, monetizing YouTube, and the strength of Google's overall advertising offering.

Asked which pending litigation and regulatory issues the company sees as the greatest risk, Schmidt brought up copyright infringement suits from Viacom and the Authors Association of America, saying "it would be great if they would go away, but we take them very seriously."

While none of the top brass commented specifically on the pending DoubleClick acquisition, Schmidt did say, "Google is in the information business. There is the potential for governments to decide that there are things we do that aren't correct when it comes to information, and it will make our jobs harder." He added that Google is working to permit the free flow of information, and faces legal challenges worldwide--not just in the U.S.

In terms of monetizing the $1.6 billion YouTube investment, Kordestani said that while global brands like Pepsi and Coke had succeeded in using the video platform to develop brand affinity and "have a two-way conversation with users, [Google] still needs to prove this model to advertisers and publishers before we scale it."

Kordestani added that engineering, sales, and marketing teams were working constantly on YouTube's ad platform, as well as on the search giant's forays into radio and print advertising, but that it is still "too early to see a material impact, given the scale of the main side of the business." Google plans to expand various non-search advertising endeavors beyond the U.S., a major factor in its large percentage of international hires.

Google is expected to take in some $5.9 billion in online advertising revenue this year--almost 30% of the entire U.S. market, according to eMarketer. But some analysts have noted that the bulk of that revenue is search-dependent.

"Google's spectacular revenue growth remains unbalanced by its reliance on text-link ads," said David Hallerman, eMarketer senior analyst. "Getting greater acceptance among its advertisers for video and display ads on its network will be one of Google's greatest challenges this year."