Google’s Second Quarter Disappoints

Google earnings

Google cited robust international growth as well as sustained traffic increases at its various Web sites as the drives behind another strong quarter for the search giant. But with earnings missing Wall Street estimates, shareholders were less than ecstatic.

The company reported revenues of $5.37 billion for the quarter ended June 30, an increase of 39 percent compared to the second quarter of 2007 and an increase of 3 percent compared to Google’s (NASDAQ: GOOG) first quarter of 2008.

Google posted earnings of $1.58 billion, or $3.92 per share, compared to $1.55 billion (or $4.12 per share) for the first quarter.

However, Wall Street analysts had the company pegged for earnings of $4.72 per share, according to Thomson Reuters estimates. The miss from the Internet search leader sent shares plummeting during after-hours trading, down 8 percent at press time.

Despite the punishment from the Street, Google executives remained optimistic.

“As we continue to focus on innovating in our core business of search, ads and apps, we also look forward to enhancing the experience of our users and expanding the reach of our advertisers and partners with new technologies and formats,” Google CEO Eric Schmidt said in a statement.

He pointed especially to the company’s integration of DoubleClick, which he said is gaining momentum and creating “new opportunities in display advertising and elsewhere.”

New advertising avenues

Schmidt remained bullish during a conference call with analysts. “We continue to believe we’re well-positioned in an economic slowdown because of a flight to quality,” he said.

Some analysts and other observers have questioned whether Google will ever see significant profit from YouTube, but Schmidt dismissed such concerns, saying the company was “enormously happy” with the video sharing site as a cultural success.

While Google has experimented with a number of different ad formats to monetize the video-sharing site, Schmidt conceded he didn’t believe “the perfect ad product” has been produced yet. However, he did note that in-video advertising — ads appearing at the bottom of video clips — shows promise.

Sergey Brin, Google’s co-founder and president of technology, said mobile search advertising likewise shows great promise, particularly in countries like Japan where mobile devices tend to be more of a primary computing device.

Speaking during the earnings call, he also said Google allows advertisers to specify a mobile-only campaign, versus ads that go to the broader Web for desktop access as well — a separation that may become less important down the road.

“I see them converge more in the future, because once you have fully capable browsers on mobile devices, there’s not much difference,” he said, pointing to the Apple iPhone as the first in a series of such devices.

He predicted advertisers would have “a more fluid experience” choosing where ads should run, pointing out the potential of location-based advertising best suited to mobile devices.

Brin also said Google’s universal search — incorporating elements like videos, pictures and books — is seeing a rapid increase in popularity. In this most recent quarter, he said almost a third of all search queries had a universal search element, up from the preceding quarter, when the universal element comprised closer to only a tenth of all queries.

“Video alone is ten percent of [today’s] queries,” Brin said. “People have videos for things you wouldn’t expect.”

As an example, Brin said he recently wanted to buy a high-capacity RAID drive for personal use. After doing some research using Google, he ended up buying from a company that had a detailed video showing the system’s features and how to install it.

Core strength

The executives’ discussion of future areas of growth seek to build on several key areas where Google continued to show strength during second quarter.

Google-owned sites generated revenues of $3.53 billion, or 66 percent of total revenues, in the second quarter. This represents a 42 percent increase over second quarter 2007 revenues of $2.49 billion and a 4 percent increase over first quarter 2008 revenues of $3.40 billion.

The next big source of revenues comes from the company’s partner sites which generated revenues through AdSense programs of $1.66 billion, or 31 percent of total revenues, in the second quarter. This represents a 22 percent increase over network revenues of $1.35 billion generated in the second quarter of 2007 and a 2 percent decrease over first quarter 2008 revenues of $1.69 billion.

International revenues did indeed help Google’s bottom line. Revenues from outside of the United States totaled $2.80 billion, representing a 52 percent of total revenues in the second quarter of 2008, compared to 48 percent in the second quarter of 2007 and 51 percent in the first quarter of 2008.

Google said if foreign exchange rates remained constant from the first quarter of 2008 through the second quarter of 2008, its revenues in the second quarter of 2008 would have been $88 million lower. Additionally, had rates remained constant from the second quarter of 2007 through the second quarter of 2008, its revenues in the second quarter of 2008 would have been $249 million lower.

Total paid clicks, which include clicks related to ads served on Google sites and the sites of its AdSense partners, increased approximately 19 percent over the second quarter of 2007 and decreased approximately 1 percent over the first quarter of 2008.

Google’s reported earnings don’t take into account what the search leader terms traffic acquisition costs, or TAC — the sums associated with reimbursing partners like Web site publishers that host its ads. TAC totaled $1.47 billion, or 28 percent of advertising revenues, just shy of last quarter’s expenditure.

Updated to include executives’ comments from today’s earnings call.

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