Last updated: July 16, 2010 12:24 am

Google profits fail to meet expectations

Google’s earnings fell short of Wall Street’s forecasts in its latest quarter in spite of unexpectedly robust revenues, as the search company continued to invest heavily for a new phase of growth, according to figures released late on Thursday.

Although investors had been prepared for higher costs, the acceleration in expense growth and a jump in capital spending contributed to a 4.2 per cent drop in the company’s shares in after-market trading.

Google said its headcount rose by nearly 1,200 in the second quarter, its fastest expansion in two years. That comes after repeated statements from executives this year that the company had put the cost control of last year’s recession behind it as it pursued new markets.

The evidence that Google was following through on its promise to invest heavily in long-term opportunities came against the background of what Eric Schmidt, chief executive, said had been “solid growth in our core business and very strong growth in our emerging businesses”.

Net revenues in the second quarter of the year, after deducting the traffic acquisition costs it pays to other websites, rose 24 per cent to $5.1bn, above the $5bn most analysts had expected. Google’s pro-forma earnings per share – the basis on which investors judge the company – came in 10 cents short of most estimates, at $6.45. That compared with $5.36 a share in the same period a year before. Wall Street had already been put on alert about potential pressure on Google’s profit margins after a burst of higher spending in the opening quarter of this year.

For the second quarter, it reported a pro-forma operating profit margin of 39 per cent, down from the 41 per cent it recorded in the first quarter.

Patrick Pichette, chief financial officer, said Google was investing for what it expected to be a big expansion in online markets in the next decade. “We think it’s the right thing to do at the moment in the company.”

The latest figures also reflected only a modest improvement in pricing in the company’s core search advertising business, echoing a concern that had spread after the first-
quarter earnings.

Google’s closely followed cost-per-click – the amount it receives each time a user clicks on an advert – rose only 4 per cent in the second period, compared with forecasts of 6-8 per cent. The shortfall was caused partly by the lower prices that Google receives from advertising on mobile phones, and from adverts in emerging markets such as India and Brazil, said Mr Pichette.

He added: “These are the two [areas] that are growing incredibly rapidly, but in the short term might put a downward spin on the [cost-per-click] formula.”

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