Google Beats Earnings Forecast But Investors Unimpressed

Google managed to beat expectations for its second-quarter results. Here’s the release, but on first glance, it looks like Google met expectations on revenues but beat handily on profits. All in all, it looks like Google’s business held up, and it managed to keep cutting costs to boost profits. That’s not bad for a media company in this economy.

However, investors appear to have been hoping for more. The stock was down almost 3% in initial after-hours trading, indicating Google didn’t beat earnings by enough to satisfy investors. After the analyst call, Google’s shares recouped a bit, down less than 2%, so perhaps investors liked some of what they heard. But not enough to buy Google’s stock, which is already up more than 35% so far this year.

The basic stats:

* Gross revenues of $5.52 billion, up 3%. Minus traffic acquisition costs of $1.45 billion, $4.07 billion net revenues, both just a hair above forecasts.

* GAAP operating income was $1.87 billion, or 34% of revenues, up from $1.58 billion, or 29% of revenues, a year ago. Non-GAAP operating income was $2.17 billion, or 39% of revenues, up from $1.85 billion, or 34% of revenues, a year ago.

* GAAP net income for the second quarter of 2009 was $1.48 billion, up from $1.25 billion. Non-GAAP net income was $1.71 billion, up from $1.47 billion.

* GAAP EPS was $4.66 on 319 million diluted shares outstanding, up from $3.92 a year ago, on 318 million diluted shares. Non-GAAP EPS was $5.36, from $4.63.

Consensus expectations had Google earning $5.08 a share before special items (that’s the non-GAAP EPS, just above), up 10% from a year ago. It was expected to post gross revenues of $5.49 billion, or the more closely watched net revenues after payouts to Web site partners of $4.06 billion, up about 4% from a year ago but flat from the first quarter. And there are signs that search ad spending, which has skidded in recent quarters, could be stabilizing.

Other relevant stats from the quarter:

* Paid clicks up 15% over the second quarter of 2008 but down 2% from the first quarter of 2009.

* Cost per click fell 13% from a year ago but rose 5% over the first quarter of 2009.

* Operating expenses were $1.54 billion, or 28% of revenues, compared with $1.64 billion a year ago, or 31% of revenues.

* Employee count: 19,786 full-time as of June 30, down from 20,164 as of March 31.

I’ll liveblog the analyst call here, after the jump. You can also listen to Webcasts here of both the analyst call at 1:30 p.m. Pacific and a Q&A session with executives at 3 p.m. Pacific.

And the analyst call begins, with CEO Eric Schmidt, CFO Patrick Pichette, Senior VP of Product Management Jonathan Rosenberg, and Nikesh Arora, president of global sales operations and business development:

First up is Schmidt. "We've had a good quarter, one that represents our resilience. Google's business appears to have stabilized." Also implemented careful cost controls. It should put us in a good position when the recovery occurs.

Will continue to make big bets--such as Chrome OS, which is intended to speed Web apps like Chrome browser sped sites. "You don’t change the world incrementally You do it through big innovation."

Search is still an unsolved problem.

Strides in ad quality drove improvements in revenue.

YouTube is now on a trajectory that we're very pleased with.

Mobile and Android.

Lots of new apps customers at various universities and companies such as Valeo. "The model is beginning to work."

"The economic situation continues to be tough. We saw relative stability in our business in the second quarter. When the recovery comes, as it always does, we will be in a very good position."

Now Pichette goes over the details: Saw relative strength across the business despite economy and relatively strong dollar. Would have had $500 million more at currency exchange rates of a year ago.

Saw signs of strength in shopping and computers and electronics. But finance still relatively weak.

AdSense, the program by which Google places ads on other Web sites, up 2% to $1.2 billion. Display business saw strong year-over-year growth.

Operating expenses down $120 million from a year ago and flat from the previous quarter. Says he's proud of cost containment.

Lower yields on investments.

$139 million in capital spending in second quarter. That's clearly down, but it will be lumpy from quarter to quarter.

Free cash flow of $1.5 billion.

Now it's on to Rosenberg:

He's talking about how Google continues to innovate, especially trying to appeal to power searchers.

He's talking up the potential of mobile. And he touts the new (so far nonexistent) Chrome operating system.

YouTube monetized views have tripled in the past year.

Shipped more than a dozen improvements in ads quality.

What's good for the Web is good for Google. Then he talks up Google Wave, a sort of next-generation email and communications platform.

Now back to Pichette for the Q&A:

Q: Revenue per search on mobile vs. Web, and will mobile cannibalize Web ads?

Schmidt: Started doing desktop display ads on mobile for devices that have full browsers. Saw much more clicks and click-throughs. So monetize similarly--and should ultimately be better for mobile because there are more targeting possibilities.

Rosenberg: No cannibalization.

Q: Most important things to determine business has stabilized?

Schmidt: A quarter ago, we had no idea when the recovery would come. People were searching less and taking more time to buy after a search. Shopping and travel are recovering, though not finance. We're not at the moment looking at that downward spiral we thought there might be six months ago.

Arora: Less uncertainty by advertisers now vs. six months ago, especially large advertisers.

Q: Will cost efficiencies stay in place post-recession or will costs go up then?

Pichette: We've managed to keep the right balance between being frugal and ... investing in long-term opportunities. We have the flexibility we need.

Q: On cost per click, up 4%--any sign of stabilization? On paid clicks, 15% growth--will international clicks grow more, potentially with lower results?

Rosenberg: It's more seasonality. Bids tended to decline more earlier this year and no longer are declining now as a rule.

Q: Vertical search such as Twitter, shopping, travel, local: How see that concept, and how do your offerings stack up?

Schmidt: Haven't used that term because Google attempts to answer the question without categorizing. There's plenty of headroom in vertical search. Longer-term, you never know what innovation we can do.

Rosenberg: There is a lot of opportunity to get incremental monetization gains when you can further qualify the lead to advertisers.

Q: With more video images and structured data in search results, should we expect new monetization methods?

Arora: Already are, with cost per impression on video and on display networks. We are going to see different forms of monetization.

Q: More on Chrome OS?

Schmidt: We are talking to PC hardware manufacturers to design products that are very, very exciting, and really fulfill the promise of cloud computing. Our primary focus on this product will be speed... and the seamless use of online apps. No decision yet on whether consumers can download.

Q: Any sign of slower June as some saw in online advertising?

Rosenberg: Can't say anything about June in particular.

Q: YouTube video monetization details?

Rosenberg: Monetizing billions of views every month.

Arora: YouTube has established that the YouTube home page is relevant for advertisers. Also seeing a lot of interest in pre-roll advertising.

Q: Why display ads more of a focus now apparently? Role of Google/DoubleClick ad exchange?

Arora: One is YouTube. Another is Google Content Network. Seeing traction on the ad exchange. We're going to see tremendous growth in the display space.

Q: Is YouTube profitable on a contribution basis?

Pichette: Won't give economics. But really pleased with revenue growth. And in the not-too-distant future, we see a really good and profitable business.

Q: Will you charge for Chrome OS?

Schmidt: No, it's open source. Like other projects Google offers for free, they get people to ultimately use the Internet more. By making the Web a better place and getting more people online... ultimately that results in more revenue growth for us.

Q: Try consumer-paid services?

Schmidt: If our platform strategy works and there are many users of Chrome OS, there will be many opportunities for profit-making services on top of it. You will see a duality between advertising and subscription services--that infrastructure (for the latter) has yet to be built.

Q: Hearing marketers holding back budgets until fall?

Rosenberg: Most of our advertisers are not maxxing out their daily budgets.

Arora: Trying to convince advertisers that search is an ROI-based business (meaning the more you spend, the more return you can get).

Q: How likely can YouTube make money on amateur videos?

Schmidt: Has not been our focus. It's probably possible to do so. But relatively few viewers for each of those videos, so hard to target ads with enough scale.

Q: Traffic acquisition costs declining--likely to continue?

Pichette: Lots of mix issues between small and large Web site partners means big swings in TAC from quarter to quarter.

Q: Google Apps for enterprise edition: Offer premium features to generate more revenues?

Schmidt: Satisfied with $50 per user for now, maybe more services later.

Q: What are the key barriers to getting more enterprise customers?

Schmidt: Large and existing investment in infrastructure that takes time to convert. Security too. Tactical things like conversion tools from Outlook, Blackberry tools.

And that's it for the call.

Before it's here, it's on the Bloomberg Terminal.