Google rose loses bloom again

Most investors would be delighted with a 35 percent increase in net income, but not when it's Google in a soft advertising market and the results fell short of expectations. Here are highlights of what Chief Executive Eric Schmidt and others had to say during Google's conference call about its second-quarter financial results.

• To recap, Google reported net income of 1.25 billion, a 35 percent increase over the earlier year. But earnings per share, excluding various items, were $4.63 per share, short of the $4.74 expected by analysts surveyed by Thomson Reuters. Revenue increased 39 percent to $5.37 billion. Excluding $1.47 billion in commissions called traffic acquisition costs, the revenue was $3.88 billion. Analysts had expected revenue, excluding commissions, of $3.9 billion.

Google revenue continued its upward trajectory in the second quarter, but not to the satisfaction of Wall Street.

Google revenue continued its upward trajectory in the second quarter, but not to the satisfaction of Wall Street. (Click image to see larger version.)
(Credit: Google)

• "We're very pleased with what we believe are good results in one of the weaker quarters in our normal cycle," Schmidt said. "Traffic and revenue held up well despite uncertain economic conditions."

• "The partnership with Yahoo is obviously the signature event," Schmidt said of the quarter. "We believe the ad deal is a win for the industry because it allows Yahoo to remain independent."

• Outgoing CFO George Reyes said the biggest expense was Google's data centers; capital expenses totaled $698 million. Hiring was a relatively slow, increasing by only 448 to reach 19,604.

• Chief Economist Hal Varian: "Despite the weakness in the economy, ad revenue seems to be holding up well in most sectors." The weakest sector looks like real estate.

• Co-founder Sergey Brin: "We substantially increased the size of our index. The index we refresh every few minutes has grown tremendously, so our users get much fresher and faster results across a greater range of sources."

• Brin: "AdSense now allows third parties to host and serve ads. It's important to many advertisers. Lenovo is now advertising with us because we can support third-party advertising."

• Ah, now to the heart of the matter. Brin said Google is having second thoughts about how much it reduced "coverage": the fraction of search results that have ads. Google generally tries to reduce coverage to drop low-quality ads that searchers don't click on, but it may have overshot the mark, he said.

"There is some evidence that we were perhaps a little overly aggressive in decreasing coverage in the past quarter," Brin said. "Historically...we try to reduce our coverage at the same time as improving the monetization. Clearly that's not the ideal strategy indefinitely, because we don't want to end up with no ads. From a quality point of view, ads are a significant addition to our page."

• Schmidt, who has spoken of the urgency of converting YouTube popularity into revenue, had this to add: "We're enormously happy with YouTube. The cultural and end-user success is far, far greater than we ever expected. We're working on revenue scenarios, and newer (ad) products. I personally do not believe the perfect YouTube ad (mechanism) has been invented. We just rolled out in-video ads."

• More from Schmidt on YouTube, as he calls finding the right ad model the "holy grail" that will mean tremendous revenue.

• Brin said Google has "increased coverage in universal search," under which Google search results show not just a list of Web pages but also pull in results such as maps, videos, and images.

In the first quarter about a tenth of queries showed universal search results, but now, "A bit under a third of our queries now have a bit of universal search in them," Brin said. "Our feeling is, and our experiments (show), this is significantly improved information for our users. I think you'll find increasing universal coverage in corpuses that you wouldn't expect." And it's the unexpected universal results that are valuable, he said, where, for example, Google shows a video on a search where the user wouldn't have thought to click on the video search tab.

• I wasn't overpowered by the ability to add artwork or other fancier graphical skins to iGoogle, the company's customizable home page, but apparently some people were when the company launched it in April. "Hundreds of thousands signed up for iGoogle because of themes," Brin said.