Google: what earnings shortfall?

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Wall Street’s trigger finger always starts to twitch when Google’s earnings roll around. In the most recent quarters the shares have notched up one day movements of – 9 per cent and + 20 per cent the day after earnings reports. That’s made it a bumpy ride for investors this year.

So it’s no surprise that the stock dropped 8 per cent in after-market trading on Thursday after Google failed to meet the Street’s second quarter earnings forecasts (of course, Google steadfastly refuses to dignify such forecasts by issuing guidance of its own.)

When I got a brief word with CEO Eric Schmidt just now, he pretty much brushed off this discrepancy as a failure by Wall Street analysts to take account of Google’s lower cash balances. “As best we can tell,” he said, “they [analysts] didn’t back out the cash we paid for DoubleClick.” With less money in the bank, interest income dropped by around $80m, accounting for the earnings “disappointment” (outgoing CFO George Reyes was at pains to stress that the company hadn’t taken any investment losses in the rocky financial markets.)

Was there any other new information to justify a sharp drop in Google’s shares? Hardly. The company wheeled out Hal Varian (the former UC Berkeley economist known to students across the US as the author of the seminal university textbook on the subject) to explain that the company’s click-based advertising was holding up well even in the most economically sensitive sectors, with the exception of real estate.

As Schmidt summed it up when I spoke to him, things are playing out exactly as the company had expected three months before: “We’re basically the same as we were last quarter.” (He was quick to add that Google did not believe it was necessarily immune from an economic slowdown, but that its form of advertising should do better than most at such times.)

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