Earnings: Google's earnings a letdown

SAN FRANCISCO -- Google Inc.'s earnings growth bogged down more than investors anticipated during the second quarter, raising worries that the ailing U.S. economy is starting to touch the Internet search leader.

Although Google's management maintains that the company will thrive even if the economy deteriorates further, the results released Thursday caused Google shares to plunge by about 8 percent.

The company said it earned $1.25 billion, or $3.92 per share, during the three months ended in June. That represented a 35 percent increase from net income of $925 million, or $2.93 per share, at the same time last year.

If not for costs incurred for employee stock compensation, Google said it would have earned $4.63 per share. That figure missed the average earnings estimate of $4.74 per share among analysts surveyed by Thomson Financial.

It marked just the fourth time that Google hasn't exceeded analyst expectations in its four years as a public company.

Investors expressed their dismay as Google shares plummeted $42.44, or 8 percent, in Thursday's extended trading after closing at $533.44, down $2.16.

Google's second-quarter revenue fared slightly better than earnings, rising 39 percent to $5.37 billion from $3.87 billion at the same time last year.

After subtracting commissions paid to its ad partners, Google's revenue totaled $3.9 billion -- about $30 million above the average analyst estimate.

A big part of Google's earnings letdown had nothing to do with its main business of selling online advertising.

After paying $3.2 billion to buy ad service DoubleClick in March, Google had less cash in the bank and was receiving less income on its remaining money because of lower interest rates.

Those factors produced just $58 million in interest payments and other income in the second quarter, down from $137 million a year ago.

"We continue to believe we are very well positioned," Google Chairman Eric Schmidt said to assure analysts in a conference call.

Hal Varian, Google's chief economist, told analysts the company might even benefit from a "Wal-Mart effect" if rising energy and food costs cause budget-conscious consumers to search for deals more frequently online. If that happens, consumers theoretically will click more frequently on the ads that generate most of its profits.

Despite its management's outward confidence, Google appears to be treading more carefully than it has in years. For instance, the company added just 448 employees during the second quarter -- the fewest hired since the fourth quarter of 2004 when it ushered in 353 new workers.

Since then, Google has been hiring an average of nearly 1,200 workers per quarter to expand its payroll to 19,604 employees.

Schmidt said Google simply doesn't need as many new workers as it has in recent years. But analysts also suspect that management is trying to curtail some of its expenses in an effort to fatten its profit margins in a time of economic turmoil.

Google offset some of the economic weakness in the United States by showing more ads to Web surfers overseas. International markets accounted for $2.8 billion, or 52 percent, of its second-quarter revenue.