Google Profit Rises But Shares Tumble
28% Gain Misses Analysts' Expectations

By Sam Diaz
Washington Post Staff Writer
Friday, July 20, 2007

Few companies can offer Wall Street a 28 percent gain in profit and a 58 percent increase in revenue and then have their stock prices drop. But that's exactly what happened to Google, which had repeatedly exceeded the quarterly targets set by financial analysts -- until now.

Yesterday, the company reported profit of $925 million, or $2.98 a share, for the second quarter, up from $721 million, or $2.39 a share, in the comparable quarter a year earlier but down from $1 billion in the first quarter of 2007. Revenue was $3.87 billion, up from $2.46 billion in the comparable quarter of 2006.

Wall Street, which had been expecting profit of $3.59 a share, quickly reacted, pushing the share price down more than 7 percent in after-hours trading as of 8 p.m. Shares had closed down 0.17 percent, at $548.59.

The company said several factors led to higher-than-expected expenses, including spending on hires and revisions on the methodology used for an employee bonus.

"There were some slightly rough edges around the quarter, but make no mistake, the company continues to perform at a ridiculous level," said Derek Brown, an analyst with Cantor Fitzgerald in San Francisco.

Because Google does not offer earnings guidance, analysts have traditionally underestimated its performance. Sergey Brin, co-founder and president of technology, said it was analysts who were off target this quarter, not Google.

"If the weatherman predicts rain and it ends up being sunny, it's not that God was wrong," he said.

Brown said that there was no across-the-board stumble by the company and that revenue came in "comfortably ahead of our estimates."

"Wall Street has done a poor job, myself included, in targeting Google," Brown said. "Generally speaking, we've significantly discounted the company's ability to grow and drive profit."

During a conference call with analysts, chief executive Eric Schmidt said that traffic on Google was stronger than expected in the quarter but noted that the second quarter is traditionally slower than others. He also said the company is receiving early positive feedback on new advertising partnerships with television and radio stations and newspapers, including The Washington Post.

"We've moved from the beta phase and are seeing really excellent adoption," Schmidt said. "But it's too soon to see material impact compared to other sides of the business. We need to prove this product before we scale it."

Analysts did not question executives about Google's $3.1 billion proposed acquisition of DoubleClick, an online advertising company, or about Washington's interest in it, especially as it relates to customer privacy issues.

This week, Rep. Bobby L. Rush (D-Ill.), chairman of a House Commerce subcommittee, launched an investigation into the deal and said he would hold a hearing on it. No date has been set.