Google and Microsoft Earnings Rise but Slightly Miss Estimates

By Kim Hart
Washington Post Staff Writer
Friday, July 18, 2008

Earnings reported by Google and Microsoft yesterday fell short of Wall Street's expectations despite increases in profit during the second quarter, suggesting that the economic troubles afflicting the banking and housing industries may be spreading to advertising and consumer spending on the Internet.

The quarterly reports come as the technology giants spar over access to Yahoo's advertising business. Google has proposed a partnership that would allow its ads to run alongside some Yahoo searches. The agreement has been called anti-competitive by Microsoft, whose own bid for Yahoo was rejected earlier this year.

The Justice Department and several states have opened antitrust reviews of the deal.

Google reported a profit of $1.25 billion, a 35 percent rise over the corresponding period last year, and its revenue jumped 39 percent, to $5.37 billion. But Google's earnings of $3.92 per share missed analyst estimates by 8 cents.

The Mountain View, Calif., company said earnings were bolstered by its search engine's international growth. International markets accounted for 52 percent of Google's revenue and helped offset grim U.S. economic conditions.

"Traffic has held up well despite uncertain economic conditions," Google chief executive Eric Schmidt said during a conference call with analysts and investors. He added that he was pleased with the results during what is typically a slow period of the year.

Aggregate paid clicks, or the number of clicks related to ads on Google and its partner sites, increased 19 percent, although they were down slightly compared with the first quarter.

Search queries weakened for automobiles, home-financing and real estate agencies because of fewer transactions in those areas, said Hal Varian, Google's chief economist.

"We see consumers are being cautious with online spending patterns just as they are with offline," he said, but during an economic slowdown, "the last thing an advertiser wants to cut is spending on search-based advertising."

As of 8 p.m., Google shares had fallen $40.69, to $492.75 in after-hours trading. The earnings reports for both companies were released after the market closed.

Microsoft said its profit for the quarter jumped to $4.29 billion, 42 percent more than the corresponding period a year ago, boosted by strong sales of its Windows and Office software. The Redmond, Wash., company's revenue increased 18 percent, to $15.84 billion.

Although earnings rose to 46 cents per share, they missed Wall Street's expectations by a penny per share, according to a Thomson Reuters survey. While its Windows and Office software showed strong sales, the units that make the Xbox and sell online advertising lost money.

As of 8 p.m., Microsoft shares had fallen $1.65, to $25.87 in after-hours trading. In a conference call yesterday, Chris Liddell, chief financial officer, said he was disappointed with the share price and attributed it to "general market turbulence and uncertainly surrounding the outcome of the Yahoo discussions."

In light of the proposed deal between Google and Yahoo, Liddell said Microsoft was accelerating its investment in online services. The company plans to invest more aggressively in its search offerings and online advertising platforms. Microsoft will also speed up the launch of its cash-back program, which gives consumers cash incentives to use its search engine.

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