Relax folks, Google isn't Yahoo

The search king's second quarter falls short of some expectations, but 58 percent growth isn't so bad.

Elinor Mills Former Staff Writer
Elinor Mills covers Internet security and privacy. She joined CNET News in 2005 after working as a foreign correspondent for Reuters in Portugal and writing for The Industry Standard, the IDG News Service and the Associated Press.
Elinor Mills
4 min read
Google investors sure are a jittery bunch.

The search king disappointed Wall Street on Thursday, missing earnings expectations by 3 cents per share. After-hours traders reacted with alarm, sending the company's stock down more than 7 percent by early evening to $509.53 per share. Other Internet stocks, including Yahoo, eBay and Amazon.com, were pulled down in after-hours trading as well.

Now everyone needs to relax: Google isn't going out of business quite yet. Nor are eBay, Amazon.com or even Yahoo, for all it's well-documented problems.

So what happened? Looks like the Googlers got a little ahead of themselves with spending. Specifically, it appears the culprits were payroll and data center construction, Google Chief Executive Eric Schmidt said in a conference call with analysts. The company hired 1,548 employees during the quarter, bringing the total number of employees to 13,786.

"We overspent against our own plan in the area of head count," Schmidt said. "We will watch this closely going forward."

"The company doesn't offer guidance, so in general, the Street is flying to a large degree blind on a company that is projected to do $16-plus billion in revenue this year."
--Derek Brown
Cantor Fitzgerald analyst

Translation: we goofed. And people shouldn't forget that this isn't the first time Google has goofed. The company missed earnings expectations for the fourth quarter 2005, citing a higher-than-expected tax rate. The stock fell more than 9 percent in after-hours trade.

But the company that can actually make a mistake or two more then bounced back from that hiccup. This most recent quarter? It's hard to even call it a hiccup, unless you're buying into the overheated expectations on Wall Street.

Total revenue rose 58 percent from the same quarter a year ago to $3.87 billion on continued strength in its core search advertising business. Excluding traffic acquisition costs, or commission paid to content partners, revenue was $2.72 billion, $40 million higher than what analysts were expecting.

Google's net income for the quarter was $925 million, or $2.93 a share, up from $721 million, or $2.33 a share, a year earlier. Excluding one-time items such as employee stock-based compensation, income was $1.12 billion, or $3.56 a share, compared with $925 million, or $2.93 a share, a year ago. But that was 3 cents less than what analysts were expecting, hence the after-hours hyperventilation.

"There seems to be an overreaction," said Derek Brown, of Cantor Fitzgerald, in a considerable underreaction.

You could blame Google, in part, for this response. Because its executives don't provide a forecast, minor stumbles like this can have a disproportionate impact. "The company doesn't offer guidance, so in general, the Street is flying to a large degree blind on a company that is projected to do $16-plus billion in revenue this year," Brown said.

But not all Wall Street analysts were disappointed. "Google did better than I expected and better than what any reasonable expectation should have been," Steve Weinstein of Pacific Crest Securities said. "The fundamentals are remarkable when you consider the overall industry and their share in that market."

By contrast, Google's main rival Yahoo saw its second-quarter earnings drop from a year ago on slowing growth in its display advertising business. Yahoo, which had a management shakeup last month that led to co-founder Jerry Yang replacing Terry Semel as chief executive, also warned that revenue for the rest of the year would be lower than expected.

Google continues to expand its search market share. Google has 52.7 percent share of the searches in the U.S., compared with Yahoo's 20.2 percent and Microsoft's 13.3 percent, according to Nielsen/NetRatings.

Not everything is perfect at the Googleplex, of course. The company has proposed a $3.1 billion cash acquisition of online ad company DoubleClick, which would give it a needed boost in the display advertising market. The U.S. Federal Trade Commission is investigating antitrust concerns with the deal, voiced by companies like Microsoft and AT&T. And consumer groups say the acquisition poses privacy concerns because of the amount and types of consumer Web data Google would have access to.

Google also faces copyright lawsuits over its book-scanning project and pirated videos that have appeared on its YouTube viral video site. "It would be great if those would go away," Schmidt said.

The company is experimenting with a system that will allow copyright holders to get their content removed from YouTube quickly, said co-founder Sergey Brin. "We're optimistic we will be able to deploy that widely in the next year," he said.

So Brown has same good advice for the nervous night-trading crowd: "Don't lose the forest for the trees."