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Google Q2 profit up 35%, misses view

business Updated: Jul 18, 2008 11:09 IST
Reuters
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Google Inc reported a weaker-than-expected 35 per cent rise in net profit as the company blamed lower returns from managing its huge cash pile rather than softening sales of online advertising.

Shares of the company tumbled 8 per cent to below $500, as Wall Street has come to count on Google to deliver revenue and earnings surprises over and above expectations each quarter.

"It's hard to love the numbers," said Colin Gillis, analyst at Canaccord Adams. "There's the initial shock of this being the best company in the space and it just fell short."

The disappointing profit came as Google said second-quarter online ad revenue held up well across sectors and world regions despite a weaker global economy that has tripped up rivals. Officials pointed to problems managing its cash - now totaling $12.7 billion - in the face of volatile interest rates, the cash drain of recent acquisitions and higher costs to hedge foreign currency risk as operations expand overseas.

Google shares fell as much as 10 per cent from a Nasdaq close of $533.44. They recovered some to around $492 after Chief Executive Eric Schmidt reassured investors on a conference call about traffic and revenue.

"Traffic and revenue have held up well despite uncertain economic conditions, as everybody knows," Schmidt said.

Second-quarter net income rose to $1.25 billion, or $3.92 per diluted share, from the year-earlier quarter's $925 million, or $2.93 per diluted share. Excluding stock-based compensation costs, it was $4.63 a share, below a $4.72 average of Wall Street forecasts, according to estimates. Gross revenue rose 39 per cent to $5.37 billion, matching the average of analysts' estimates.

"Revenue growth, largely from sales of advertising that run alongside Google search results, is positive in every major sector, except for real estate, and even that one is only down by a small amount," Google Chief Economist Hal Varian said.

Troubles managing risks

It was various financial maneuvers to manage cash in the quarter that caused a sharp drop in Google's "other income and expenses" to $57.9 million from $137.1 million a year ago. Chief Financial Officer George Reyes cited lower yields on cash and lost interest on the $3.2 billion in cash it shelled out in March for advertising technology company DoubleClick. Google also spent more to hedge foreign currency exposure, as international revenue rose to 52 percent of revenue from 51 per cent the previous quarter and 48 percent a year before.

"Investors are smart and will overlook some of that noise and focus on core operations," RBC Capital analyst Ross Sandler agreed. "(This) is not an operating item. We were telling investors to step in, it (the share sell-off) was overblown." But Wall Street analysts said they were baffled at how the company could be caught short by non-operating factors like interest rates and currencies when its operating businesses appeared to be holding up so well, despite a tough economy. "There is nothing fundamentally that has changed for Google," Canaccord's Gillis said.

"If you want to own anything in the Internet sector, it is still Google. They are not losing (market) share. They are not losing ad dollars to another medium," he said, referring to demand for Google search ads. In the year-ago's second quarter, the Silicon Valley company similarly surprised analysts with disappointing earnings, but for different reasons. Operating expenses were exploding as the company was on a hiring spree. The latest quarter's results showed far more discipline. At the end of June, it had 19,604 employees, up just 2 percent from March.

Hiring jumped 13 per cent in the same period a year ago. Also, spending on data centers, computers and networks to support its range of Web services was reduced to $698 million from $842 million in the first quarter of this year. RBC's Sandler predicted Google shares would recover some of their losses on Friday as investors focus on the underlying health of the company's Web search and online ads business. Since its initial public offering in August 2004, Google has regularly reported revenue surprises about 2 percentage points above the average analyst expectation, according to Reuters Estimates data.

Results that fall in line or below Wall Street expectations have led to sharp share-price declines. Google shares have struggled after touching a record of $741.79 late last year -- when expectations surged for its newer businesses selling online display, Web video and mobile phone advertising. The stock hit a bottom of $412 in March and recovered somewhat as fears that its core search business was maturing were forgotten after strong first-quarter results.

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