Google Keeps Scoring

Yesterday, Google reported Q2 earnings of $4.63 a share (excluding stock-based compensation costs), missing Wall Street’s expectations of $4.74 EPS. The company reported a weaker-than-expected 35% rise in quarterly net profit, according to Reuters. Google attributes this to lower returns from its cash pile (which is now $12.7 billion), rather than slacking online ad sales.

Net income for the second quarter was $1.25 billion, compared with $1.31 billion in the first quarter. Operating income for the second quarter was $1.58 billion, which is 29% of revenues, compared to 30% in the first quarter. All in all, operating income was up from $1.55 billion in Q1.

Quarterly revenues were $5.37 billion, a 3% increase compared to the first quarter of 2008 and a 39% increase over the same period last year. See the steady rise in revenue in the chart below.

Although most companies could only hope for such results in this dismal economic climate, Google’s stock was quick to reflect Wall Street’s disappointment – shares were down as much as 12% after market close on Thursday.

Google’s growth rate has decelerated while its annual revenue has jumped from $3.2 billion to $16.6 billion in the past three years. Last quarter (Q1 2008) the company’s revenue rose 42% in a difficult financial environment. Approximately 51% of this revenue came from international markets, whose contribution increased to 52% in the second quarter, but the company had to spend more to cover its foreign exchange exposure.

Google’s share of the search engine market was 58.5% in January 2008. This figure had grown to scary 62% in May. In a previous post I mentioned that Google controls 79% of the pay-per-click ad market and derives 99% of its revenue from advertising. But according to Eric Schmidt, CEO, “Traffic and revenue have held up well despite uncertain economic conditions, as everybody knows.”

Analysts were bullish on the stock because of the company’s stronghold in the search engine market. Another contributing factor to Street opinion is the potential revenues from the acquisitions of DoubleClick and YouTube.

In the near future, revenue from ads on mobile phones will also be a part of Google’s profits. As I mentioned earlier, Google still needs to increase their vertical scope and enter verticals such as Jobs, Travel, Auto, Real Estate Health and Personals.

Analysts still feel strongly about Google and believe that the company’s fundamentals haven’t changed. According to analyst Colin Gillis from Canaccord Adams, “If you want to own anything in the Internet sector, it is still Google. They are not losing (market) share.”

I have to agree. No one is yet able to hit Google where it is weak: vertical search, vertical ad networks, personalization. Microsoft and Yahoo! are mired in their own messy maneuverings, leaving the field wide open for Google to keep scoring!