Google Q2 Earnings Fall Short

Techtree News Staff, Jul 19, 2008 0850 hrs IST

While Eric Schmidt, CEO of Google, insisted all was well in spite of the below par performance, Google insiders wonder whether the strategy of reducing ad coverage was implemented right.

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To the surprise of Wall Street executives, Google's second quarter earnings fell short of estimates, following which shares fell 10% in after-hours trading. This below par performance comes from a puzzling decision to cut down on ad space covered by Google.

On Thursday, Google reported a net income of $1.25 billion with revenues of $5.37 billion for the quarter ended June 30, 2008, an increase of 39% compared to the second quarter of 2007 and an increase of 3% compared to the first quarter of 2008. Google reports its revenues, consistent with GAAP(Generally Accepted Accounting Principles), on a gross basis without deducting traffic acquisition costs, or TAC. In the second quarter of 2008, TAC totaled $1.47 billion, or 28% of advertising revenues.

"Strong international growth as well as sustained traffic increases on Google's web properties propelled us to another strong quarter, despite a more challenging economic environment," said Eric Schmidt, CEO of Google. "As we continue to focus on innovating in our core business of search, ads and apps, we also look forward to enhancing the experience of our users and expanding the reach of our advertisers and partners with new technologies and formats, particularly as our integration of DoubleClick gains momentum and creates new opportunities in display advertising and elsewhere."

Although the estimates may have been missed, Google is still in a better position than many of its peers and competitiors.

According to Jonathan Rosenberg, Google's Senior Vice President for product management, Google had decided to reduce its advertising coverage to an all-time low. In other words, the percentage of Web pages on which Google displays advertising has been cut down upon.

While conventional logic dictates that a company facing slow economic times would make every attempt to step up revenues by increasing ad coverage, Google has pro-actively reduced its ad coverage. According to Rosenberg, who quoted co-founder Larry Page, Google was interested in increasing "ad quality" by showing only those ads that users really want to see.

Google's co-founders Larry Page and Sergie Brin hold slightly divergent views on reducing ad coverage

While this is undoubtedly a unique strategy, not all within Google agree. Sergie Brin, Google's other co-founder, was of the opinion that the company had been a 'little more aggressive in decreasing [advertising] coverage' than they should have been.

A quick roundup on Google's Q2 returns

Operating income was $1.58 billion, up from $1.55 billion in the first quarter

Traffic acquisition costs were $1.47 billion

Google site revenue was $3.53 billion, up 42 percent from a year ago, but up 4 percent from the first quarter. Partner sites (AdSense) was $1.66 billion, up 22 percent from a year ago, but down from the first quarter. International revenue was 52 percent of the total compared to 48 percent from a year ago

Paid clicks were up 19 percent, but down 1 percent from the first quarter

Google had 19,604 full-time employees as of June 30

Capital expenditures were $698 million, most of which was spent on IT

Source: ZDNET, The New York Times

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