Despite earnings miss, Google executives, analysts still upbeat

SAN JOSE, Calif. — For just the second time in its short history as a public company, Google flubbed its quarterly earnings report, prompting an immediate run on its stock.

Google announced today second-quarter profit of $925 million, or $2.93 a share, a dime less than what analysts had been expecting.

In a conference call after the report was released, Chief Executive Eric Schmidt said the miss was caused by a hiring spurt and a change in accounting for bonuses. "We are very pleased with the talent we brought on board, but going forward, we will watch this area very closely," he said.

Schmidt and other executives went on to describe Google's overall business as exceptionally strong. In particular, Schmidt said traffic to Google was unexpectedly accelerating. Chief Financial Officer George Reyes said Google was finding ways to make more money from the ads it showed to people who came to Google's Web sites.

But the optimistic comments failed to staunch a wave of selling, which caused Google's value to fall $39.33, or 7.2 percent, to $509.26 in after-hours trading after the report was released. Google closed the regular trading session today at $548.59, up 17 percent from the start of the year.

"If I wasn't prohibited in trading in the stock, I would see this as a buying opportunity," said Anders Bylund, an analyst with the Motley Fool who said he owns some Google shares.

Other analysts maintained their buy ratings.

But Fred Hickey, who writes the High-Tech Strategist newsletter, said Google's amazing streak of success was finally coming to an end.

"This is just the first of many bombs because the economy isn't going to get any better," Hickey said.

Hickey said deflating U.S. real-estate values would hurt Google's core customers: ordinary consumers who flock to its search engine and advertisers who bid for prominent placement next to search results.

Hickey predicted Google would end up having trouble managing expenses like Yahoo did in the wake of the tech bust of 2000.

Google co-founder Sergey Brin said he did not see such a scenario playing out. "We are really happy with our quarter," he said in an interview, noting that revenue, excluding the cost of various marketing deals, was higher than expected.

Google's revenue for the quarter ended June 30 was $3.87 billion, up 58 percent from the the same quarter a year ago. Google's own sites accounted for 64 percent of the revenue, while sites that display Google's ads in exchange for a cut of the advertising sales accounted for an additional 35 percent.

International advertising made up 48 percent of revenue, up from 42 percent during the same period a year ago. Executives said many of the new hires were overseas.

Brin said in the past Google has been "chronically understaffed," and that the new wave of hiring would give Google more flexibility in the future about choosing future areas of expansion.

Google's total headcount is now 13,786 people, up 1,548 from the first quarter.

Spending on property, computers and other infrastructure fell 18 percent compared to a year ago to $575 million. But Reyes warned that Google would continue to aggressively invest in this area.

Google is also spending on acquisitions. Earlier this month, it announced it was buying Postini, an e-mail security company, for $625 million in cash. In April, it announced the acquisition of DoubleClick for $3.1 billion in cash.

The DoubleClick acquisition is currently being scrutinized by regulators in the United States and Europe who are concerned that combining the two online advertising companies would choke off competition. Company executives could be called to testify at a hearing in the House of Representatives later this summer.