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Google's 2Q Profit Lets Down Investors

By MICHAEL LIEDTKE
The Associated Press
Friday, July 20, 2007; 2:42 AM

SAN FRANCISCO -- Google Inc. co-founders Sergey Brin and Larry Page have always told Wall Street that positioning the Internet search leader to realize its long-term ambitions is more important to them than meeting the earnings expectations of shortsighted investors. Just in case anyone forgot, the company punctuated the point with its second-quarter results.

Propelled by the online advertising boom, Google said Thursday that revenue surged to $3.87 billion, up 58 percent from the same time last year _ a gain that was slightly above analyst estimates.

But Google's profit margins narrowed as management ramped up spending to hire additional employees and buy more content for its Web sites. That left Google with a 28 percent increase in its second-quarter earnings, by far its slowest growth since becoming a public company in August 2004.

Investors expressed their dismay in Thursday's extended trading, causing Google shares to plunge by $39.06, or 7.1 percent, after ending the regular session at $548.59. If it carries over into Friday's trading, the harsh reaction threatens to wipe out about $12 billion in shareholder wealth.

"It seems like a pretty significant overreaction in the market," said Cantor Fitzgerald analyst Derek Brown. "The quarter wasn't perfect, but it was really good."

The backlash didn't seem to faze Brin, whose estimated $16 billion fortune hinges on Google's stock price.

"I guess there are some people out there who think we have already picked all the low-hanging, juicy fruit, but I think the jury is still out on how far we can take this business," Brin said.

Capitalizing on the Internet's largest ad network, Google earned $925.1 million, or $2.93 per share, during the three months ended in June. That compared with net income of $721.1 million, or $2.33 per share, at the same time last year.

If not for costs associated with employee stock compensation, Google said it would have earned $3.56 per share. That figure missed the average analyst estimate of $3.59 per share among analysts polled by Thomson Financial. It marked just the second time that Google hasn't exceeded analyst expectations in its 12 quarters as a public company.

After subtracting commissions paid to its advertising partners, Google's revenue was $2.72 billion _ about $40 million above analyst projections.

Google also fared far better than one of its biggest rivals, Yahoo Inc., whose profit dipped 2 percent in the second quarter while revenue increased by 8 percent.

The company's success revolves around its search engine, which processes nearly half of all search requests in the United States. The search engine serves as the hub of a lucrative ad network that spans thousands of Web sites.

Although Google isn't even a decade old yet, the company's revenue is expected to surpass $15 billion this year. But the second quarter left analysts guessing about how much of that revenue will trickle down to Google's bottom line.

Already well-known for pampering its employees, Google poured even more money into expanding its work force during the spring. Google hired 1,548 additional employees in the last quarter, compared with the 1,152 workers it added at the same time last year.

Google Chairman Eric Schmidt told analysts in a conference call that the company would be more "careful" about adding employees in future quarters. Brin reiterated that sentiment in an interview, saying the company would be more disciplined in its future hiring now that it has attracted enough employees to pursue its ambitions.

"We have always been perpetually understaffed until now," Brin said.

Mountain View-based Google ended June with 13,786 employees, a 74 percent increase during the past year.

The company also listed "content acquisition costs" in its quarterly breakdown for the first time.

American Technology Research analyst Rob Sanderson interpreted that development as a sign that Google is anteing up to avoid copyright complaints, particularly at YouTube.com, the popular online video site acquired late last year for $1.76 billion.

Viacom Inc. is suing YouTube and Google for $1 billion in damages, alleging rampant infringement.

Google included its content acquisition costs with expenses for operating data centers and processing credit card charges. Combined, those costs totaled $412 million, or 11 percent of revenue in the second quarter. Last year, Google spent $204 million, or 8 percent of revenue, in the same category last year when content acquisition costs weren't included.

On the Net: http://www.google.com

© 2007 The Associated Press