GOOG $550-$500 earnings climb, but miss Street targets
Earnings up 28%, but expenses rise as hiring, bonus accruals exceed budget
By Dan Gallagher, MarketWatch
Last Update: 6:34 PM ET Jul 19, 2007
SAN FRANCISCO (MarketWatch) -- Google Inc. saw earnings jump more than 28% in the second quarter, though the bottom line came in slightly beneath Wall Street's expectations for the Internet search giant.
Spending was the culprit, as the company also reported a 57% jump in revenue. During the quarter - which is seasonally the weakest for Google - the company saw an increase in expenses as a percentage of revenue across all categories. Company officers said in a conference call that Google exceeded its budget for hiring during the quarter.
The results put pressure on Google's share price, which dropped more than 7% in after-hours trading to $508 - essentially giving up the stock's gains over the last month.
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GOOG548.59, -0.91, -0.2%) hit an all-time high of $558.58 on Monday.
After Thursday's closing bell, the Mountain View, Calif.-based company posted earnings of $925.1 million, or $2.93 per share, compared with earnings of $721.1 million, or $2.33 per share, for the same period last year.
Excluding the impact of stock options and other charges, the company said earnings for the quarter would have come in at $1.12 billion, or $3.56 per share.
Wall Street had been expecting the company to post earnings of $3.59 per share, according to consensus estimates from Thomson First Call.
Revenue surged to $3.87 billion from $2.46 billion last year. The company said it paid $1.15 billion in traffic acquisition costs for the quarter, leaving it with a net revenue figure of $2.72 billion. That beat the $2.68 billion expected by analysts.
The company said cash and equivalents grew to $4.5 billion at the end of the quarter from $3.5 billion at the end of December.
Rising costs
Expenses grew in every category. Research and development expenses totaled 13% of revenue for the quarter compared with 11.5% last year. General and administrative expenses grew to 8.2% of revenue compared with 7% last year.
In the conference call, CEO Eric Schmidt admitted that one area the company exceeded its expense plan was in hiring, which added more than 1,500 workers to the payroll during the quarter.
"We are very pleased with the talent that we've brought on board, but going forward we will watch this area very closely," he said.
The company also adjusted its accounting for its employee bonus plan. CFO George Reyes said the change "will allow us to more proportionately recognize the related expenses each quarter" but led to a higher bonus accrual in the second quarter.
Still, the company was able to expand its margins as well. Operating income in the period was 33% of sales compares with 28.5% last year.
Overreaction?
For a company accustomed to blowing away Wall Street's estimates, missing the earnings target got the attention of investors, who pushed Google shares to their lowest point in more than a month in after-hours trading following the announcement.
Analysts seem less worried. Stu Barry of ThinkEquity, who rates the stock as a buy with a $700 price target on the shares, said the higher expenses with increased bonuses and hiring do not reflect the company's fundamental business opportunity.
"I don't think there's anything here to make anyone worry about the fundamentals," he said in an interview. "I think expectations were that they would outperform on both the top and bottom line, and they didn't deliver."
In a brief note to clients, Mark Mahaney of Citigroup said the results were "incrementally less positive" but added that the company "continues to exhibit the strongest fundamentals in the sector, with a reasonable valuation."
Mahaney has a buy rating and $600 price target on the stock.
The company has continued to use its dominant position in the online search market to reap increasing amounts of related advertising revenue at the expense of chief rival Yahoo.
According to data last week from Compete Inc., Google maintained its large lead in the online search market from May to June, gaining 0.3% to a 62.7% share. That compares to a 19.6% share for second-place Yahoo (YHOO : Yahoo! Inc
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