SAN FRANCISCO - Web search leader Google Inc. on Thursday reported disappointing earnings due to the costs of a recent hiring spree and a jump in other operating expenses, sending its stock down 7 percent.
Google failed to beat Wall Street expectations for only the second time in its 12 quarters as a publicly traded company.
Net profit rose 28 percent and Google gained market share against Yahoo and other rivals in online advertising. The gains were partially offset by a rise in expenses for adding staff -- something Google said would brace it for accelerating growth.
"The guys have been spending like drunken sailors," said Jeffrey Lindsay, analyst at Sanford C. Bernstein. "The story is they've blown it on expense ... Operating expenses were much higher than everyone was expecting."
Google's workforce ballooned nearly 13 percent between March and the end of June, growing to 13,786 full-time employees from 12,238 staff at the end of March.
Shares of Google fell to $508.50 in after-hours trade, down from a close of $548.59 in regular session trade on Nasdaq. The stock, which was trading just off of recent record levels heading into the report, had jumped 15 percent since mid-May.
Google said second-quarter net income rose to $925 million, or $2.93 a diluted share, compared with the year-ago quarter's $721.1 million, or $2.33 per share. On a sequential basis, second quarter net income dropped from the $1 billion reported in the first quarter of 2007.
Excluding one-time items and stock option expenses, Google posted a profit of $1.12 billion or $3.56 per share. That was 3 cents per share short of Wall Street targets.
Gross revenue rose 58 percent to $3.87 billion -- matching Wall Street's consensus forecast. Revenue included $1.15 billion in payments to affiliated Web sites who run Google Web search advertising, known as traffic acquisition costs.
International revenue rose to $1.84 billion, or 48 percent of revenue, up from 42 percent of sales just a year ago. Google, which leads the U.S. Web search business with more than a 50 percent share of the market, is even more dominant internationally, with more than 70 percent of the audience for Web searches, according to market researcher comScore Inc.
GROWTH ACCELERATES, ALONG WITH COSTS
Chief Executive Eric Schmidt told investors on a conference call that its pace of growth appears to be accelerating, rather than slowing down as normally occurs with companies its size due to what accountants often call "The Law of Large Numbers."
"I am really struck by our ability to operate and move forward at this scale. Normally, innovation at our size and growth begins to slow. But here, it seems to be accelerating," Schmidt said.
The Mountain View, California-based company is estimated to have captured nearly one-third of the world's online advertising revenue and appears to be pulling ahead of rivals. Google is growing easily four times faster than rivals Yahoo Inc. (YHOO.O: Quote, Profile , Research) and Microsoft Corp. (MSFT.O: Quote, Profile , Research) and at least one-and-a-half times the rate of eBay Inc.
To expand, it has rapidly moved over the past year to extend its reach into a variety of new markets, including online video, television, radio and print advertising. It has also expanded into the enterprise software business, the traditional fiefdom of Microsoft Corp.
But operating expenses also swelled, climbing to $1.21 billion for the quarter, accounting for 31 percent of revenue, compared with $972 million in the first quarter, or 27 percent of revenue.
"We overspent against our own plan in the area of headcount," Schmidt told investors on a conference call.
"In looking at it, we thought: 'Was this a mistake or not?'" Schmidt said. "And we decided it was not a mistake, that in fact the kind of people we brought in are so good that we're happy we did this."
Other expenses, including the costs of operating its computer data centers, credit card processing costs and the cost of acquiring programming, jumped to $412 million from $345 million in the first quarter of 2007. These costs represented 11 percent of revenue, up from 9 percent earlier this year and 8 percent a year ago, in the second quarter of 2006.
While Google shares lost $40 after the report, the shares have been on a remarkable run since the company went public in 2004. From last August, when the shares hit a recent low of $363.36, they had gained 51 percent up to Thursday's close.
The shares trade at a forward price-to-earnings ratio of 28.4 times earnings versus competitors Yahoo at 41 times and Microsoft's 18.1 times.
(Additional reporting by Michele Gershberg in New York)
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