Google Pleases Itself

Revenues continue to climb, but net profits were a cause of some concern.

Google reported today that second quarter net income rose 28 percent to $925 million, or $2.93 per diluted share, falling short of Wall Streets expectations of $3.01 a share.

Revenue was $3.87 billion, an increase of 58 percent compared to second quarter 2006 and an increase of 6 percent compared to the first quarter 2007.

Revenues excluding TAC (traffic acquisition costs) were $2.72 billion, up 63 percent from a year earlier. Profits were $1.12 billion, or $3.56 a share, excluding expenses.

Google shares declined about 6 percent within the hour after the announcement, trading around $515.

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To read more about Googles purchase of Postini, click here.

Despite the negative response from the Street, Google CEO Eric Schmidt expressed satisfaction with the companys performance during the quarter.

He cited improvements in AdSense monetization, continued growth in global Internet traffic and stronger-than-usual traffic during the beginning summer months, notably on Google.com. Google earns better margins on Google.com traffic because it doesnt have to share revenue with partners.

"The summer seasonality that we talk about does appear to be milder than we expected," said Schmidt during the second quarter financials conference call, "which was a very good surprise."

Google did report several areas in which its costs increased, including TAC and payroll. Googles TAC increased from $1.13 billion in first quarter 2007 to $1.15 billion in the second quarter, which company executives had said to expect during the first-quarter call.

Google executives also reported higher headcount than expected, leading to higher payroll costs. Payroll and facilities expenses increased from $506 million in the first quarter to $625 million in the second quarter, which executives attributed to 1,502 new hires in sales, marketing and engineering, many of which in oversees markets.

During the second quarter, Google made several big moves, including the recent acquisition of e-mail security and management firm Postini for $625 million and the purchase of graphical advertising firm DoubleClick for $3.1 billion.

The latter acquisition set off similar deals from Microsoft (aQuantive for $6 billion) and Yahoo (Right Media for $680 million), while the Postini deal has been seen as a direct challenge to Microsofts core desktop office market.

Google also replied to Viacoms $1 billion lawsuit this quarter, arguing that the lawsuit was unfounded. Lawyers for both parties are scheduled to meet later this month.

Also this quarter, Google had a small kerfuffle with eBay, Googles largest advertiser, when Googles plans to crash an eBay party caused eBay to ban Google AdWords for 11 days.

The second quarter also saw Google continue to dominate the search market, accounting for 49.5 percent of the 8 billion U.S. Internet searches, according to comScore. Yahoo accounted for 25.1 percent of searches and Microsoft for 13.2 percent, a slight increase.

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