Slowing sales overshadow Google's earnings

SAN FRANCISCO: Google Inc.'s Internet ad sales grew at their slowest rate on record during the spring, forcing the online search leader to tighten its belt another notch to propel its second-quarter profit above analyst estimates.

The performance — punctuated by revenue growth of just 3 percent — disappointed investors. The company's shares fell more than 3 percent in extended trading Thursday after the results were released.

"Google is still facing a lot of challenges because I don't think the online ad market is out of the woods yet," said Signal Hill Capital analyst Todd Greenwald.

Because it runs the Internet's most widely used marketing channel, Google's lackluster revenue growth could foreshadow even more significant sluggishness among less profitable companies fueled by online advertising and e-commerce. Many of those companies, including Yahoo Inc., will detail what happened in their second quarters in the coming weeks.

Although the U.S. recession has been making it increasingly difficult for Google to sell ads, Chief Executive Eric Schmidt said he doesn't expect the business climate to become any more challenging.

"We're not at the moment looking at that downward spiral that we thought we might see six months ago," Schmidt told analysts during a Thursday conference call. The remarks echoed comments made to reporters last week when he said the recession had already appeared to hit bottom.

On another positive note, Schmidt and other executives indicated Google's video site, YouTube, is on the verge of making money nearly three years after the company bought the service for $1.76 billion. Google is now showing billions of ads with the videos each month, said Jonathan Rosenberg, the company's senior vice president of product management.

As has been the case for years, Google gets most of its revenue through ads tied to its search engine, which controls nearly two-thirds of the U.S. market.

The Mountain View-based company earned $1.48 billion, or $4.66 per share, during the three months ended in June. That was a 19 percent increase from income of $1.25 billion, or $3.92 per share, for the same period last year.

Revenue rose to $5.52 billion from $5.34 billion in last year's second quarter. It marked Google's lowest growth rate since the company went public five years ago. It was also the company's second consecutive quarter of single-digit revenue growth. Google had never fallen below a 30 percent pace until late last year.

If not for stock compensation expenses, Google said it would have made $5.36 per share. That topped the average estimate of $5.09 per share among analysts polled by Thomson Reuters.

After subtracting ad commissions, Google's net revenue totaled $4.1 billion — about $40 million above analyst estimates.

The revenue would have been about $375 million higher if the dollar had been as weak as it was a year ago, according to Patrick Pichette, Google's chief financial officer. Google's finances swing with currency fluctuations because 53 percent of the company's sales come from outside the United States.

Google relied on cost cutting and an unusually low tax rate to boost its profits amid the slowing ad sales. For instance, the company trimmed its general and administrative expenses by 23 percent to save about $110 million and reduced its spending on capital projects by 80 percent, or $559 million.

The financial discipline resulted in the biggest quarterly reduction in Google's payroll since Larry Page and Sergey Brin started the company in a Silicon Valley garage nearly 11 years ago. Google ended June with 19,786 employees, 378 fewer than at the end of March.

A previously announced layoff of about 200 sales employees accounted for most of the reduction. Management stressed the company is still hiring.

Google's second-quarter tax rate was 20 percent, well below the 25 percent range that is typical for the company.

The company's shares fell $14.60, or 3.3 percent, after finishing the regular session at $442.60, up $4.43. The stock has surged by about 50 percent since it last traded below $300 in early March, reflecting investors' faith in Google to weather the recession better than most companies.

Google has justified that confidence so far by managing to eke out modest growth while other ad-supported businesses are reeling.

Newspapers and magazines, in particular, are envious of Google, with their advertising revenue plunging between 20 and 40 percent so far this year. Many print publishers believe Google's prosperity has been built on their backs because its search engine shows snippets of copyrighted material without sharing the revenue from ads displayed alongside the material.

Google maintains it is one of the media's biggest allies because it sends millions of people to their Web sites every day.