Google 2nd Quarter Profit Misses Estimates as Spending Rises
Eric Schmidt, chairman and chief executive officer Google Inc. Photographer: Jin Lee/Bloomberg
July 16 (Bloomberg) -- Doug Anmuth, an analyst at Barclays Capital in New York, talks with Bloomberg's Susan Li about Google Inc.'s financial results. Google, owner of the world’s most popular search engine, reported profit that missed estimates as the company ramped up spending to take on social-networking sites such as Facebook Inc. Anmuth also discusses Yahoo! Inc.'s outlook. (Source: Bloomberg)
July 15 (Bloomberg) -- Clayton Moran, an analyst at Benchmark Co., talks about Google Inc.'s second-quarter profit. The owner of the world's most popular search engine reported profit that missed estimates as the company ramped up spending to take on social-networking sites such as Facebook Inc. Moran talks with Matt Miller, Carol Massar and Julie Hyman on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Google Inc., owner of the world’s most popular search engine, reported profit that missed estimates as the company ramped up spending to take on social- networking sites such as Facebook Inc. The shares fell.
Excluding some items, profit was $6.45 a share in the second quarter, the company said today in a statement. Analysts had estimated $6.52, according to a Bloomberg survey. Net income rose 24 percent to $1.84 billion, or $5.71 a share, from $1.49 billion, or $4.66, a year earlier.
Chief Executive Officer Eric Schmidt is hiring staff and increasing the pace of acquisitions to keep from losing business to Facebook, the largest social-networking site, and Apple Inc., a competitor in mobile software and advertising. Google’s total expenses rose 22 percent to $4.46 billion in the period. The company also plans to raise as much as $3 billion by selling bonds, giving it more money to spend.
“Google’s been pretty clear that, ‘Hey, we’re going to be putting in expenses,’” said Colin Gillis, an analyst at BGC Partners LP in New York who rates the shares “hold” and doesn’t own any. “They threw a lot of money into R&D and sales and marketing.”
Google, based in Mountain View, California, fell $19.69, or 4 percent, to $474.33 in extended trading following the report. The shares, down 20 percent this year, had risen $2.68 to $494.02 in regular Nasdaq Stock Market trading.
Bonds Approved
Google approved the bond offering, its first, to fund general corporate expenses. Moody’s Investors Service assigned the company an Aa2 rating, the third-highest investment grade.
The ranking reflects Google’s leadership in Internet search and online advertising, as well as the emerging businesses of online video, mobile advertising and operating systems, the ratings company said. Moody’s also cited Google’s $30 billion of cash and lack of debt.
Excluding revenue passed on to partner sites, second- quarter sales were $5.09 billion, compared with an estimate of $4.98 billion in a Bloomberg survey of analysts.
Estimates for the quarter declined in the past four weeks as the dollar strengthened against other currencies, including the euro, fueling concern that overseas revenue would be worth less when brought back to the U.S. Analysts cut sales estimates by an average of $21.8 million, according to Bloomberg data.
The company’s cash and short-term investments rose to $30.1 billion during the second quarter. The company had $26.5 billion in the first quarter, up from $24.5 billion at the end of last year.
Using Its Cash
Google, facing a slowdown in the search market, is using cash to invest in sources of faster growth. Search-based online ad spending will rise 16 percent this year and decelerate to 8.6 percent in 2011, according to EMarketer Inc. of New York.
“It’s reasonable to expect that they would be back in investment mode,” said Mark Mahaney, an analyst with Citigroup Investment Research in San Francisco, who doesn’t own the shares. “The question is how big is that investment mode.”
Google increased its staff by almost 1,200 to 21,805 people during the quarter. The company, which gained around 300 workers from acquisitions, is using many of the hires for sales and engineering projects, Chief Financial Officer Patrick Pichette said during a call with analysts.
Investment Needed
“Successful products do require investments,” he said.
The 22 percent increase in total expenses was a bigger rise than Google posted in the first quarter, when costs climbed 18 percent year over year.
Acquisitions are a growing part of Google’s expansion plans. It has announced or completed more than a dozen purchases this year. In May, Google wrapped up its $750 million deal to buy AdMob Inc., a provider of display ads that go on mobile applications and websites, following approval by the U.S. Federal Trade Commission.
This year, AdMob and Google together may generate more than $100 million in U.S. mobile-ad sales, according to IDC in Framingham, Massachusetts.
Early this month, Google said it had agreed to buy flight- information provider ITA Software Inc. for $700 million. The deal gives it more of the online travel business and helps it compete with rivals Microsoft Corp. and Kayak.com.
Google operations in China, the world’s largest Internet market, have come under pressure amid the company’s tussle with the government over censorship rules.
“The timing of the Google-versus-China dispute suggests that the revenue likely took a significant haircut in the second quarter,” Jordan Rohan, an analyst with Stifel Nicolaus & Co. who rates the stock a buy, said in a note. China likely only contributes $100 million to $150 million annually to Google, he said.
-- Editors: Tom Giles, Nick Turner
To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net
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