Google profit misses as expenses surge

An employee answers calls at the switchboard of the Google office in Zurich, August 18, 2009.

SAN FRANCISCO (Reuters) - Google Inc missed Wall Street's profit estimates in its second quarter after a spike in expenses offset a 24 percent revenue jump, a rare stumble for a company accustomed to shattering financial expectations.

Shares of Google fell 4.5 percent on investor worries about a one-fifth increase in costs as the search engine leader -- expanding into new products and markets in hopes of maintaining the growth momentum Wall Street also looks for -- spent heavily on research and development and hired aggressively.

Some analysts said headwinds from weakening foreign currency did not hurt revenue growth as much as anticipated, as Google managed to surpass targets for net revenue.

"They're throwing more money into R&D than people were expecting and a little bit less into sales and marketing," said BGC Partners analyst Colin Gillis. "Google has been pretty clear that it's going back into investment mode. They added 1,200 people in the quarter, which means more expenses are going to kick in September."

Google, the world's No. 1 search engine, posted net income of $1.84 billion, or $5.71 a share, in the second quarter -- up from $1.48 billion, or $4.66 a share, in the year-earlier period.

Excluding items, Google's EPS was $6.45, below the average analyst estimate of $6.52, according to Thomson Reuters I/B/E/S.

Some analysts said a 22 percent year-on-year surge in total costs -- which includes research, marketing and general expenses -- hurt the bottom line.

"Operating expenses overall were higher than we had estimated, which dragged down the earnings per share," said ThinkEquity analyst Aaron Kessler.

PAYROLL BALLOONING

Google, which has made a string of acquisitions in recent months, added 1,184 employees to its payroll during the second quarter for a total of 21,805.

"The question is going to be, how much money are they going to have to be putting in for new initiatives?" asked UBS analyst Brian Pitt.

Google has beaten Wall Street revenue expectations in five of the past seven quarters and exceeded profit estimates in each of the past seven. Its shares sold off after its last two better-than-expected earnings reports when, analysts said, some investors' expectations of blow-out results were missed.

Thursday's results were a rare outright earnings miss.

Google is increasingly pitting itself against rivals beyond its usual competitors Yahoo Inc and Microsoft Corp, as it ventures into smartphone operating systems, mobile advertising and other areas in search of future growth.

Executives highlighted a three-fold jump in searches made on phones running Google's Android operating system as a sign of the platform's growing market traction. On a conference call with analysts, the executives dismissed fears that Google -- which derives half its revenue from international operations -- was hurt by slowing economic growth globally.

"We've seen no impact from what's going on in the macro world to us," CFO Patrick Pichette said.

Revenue in the three months ended June 30 totaled $6.82 billion, up from $5.52 billion in the year-earlier period.

Net revenue, which excludes costs that Google shares with website partners, was $5.09 billion, above the $4.98 billion expected by analysts polled by Thomson Reuters I/B/E/S.

Shares in Google fell to $472.00 after closing at $494.02 on Nasdaq. The stock is down roughly 22 percent from its 52-week high of $629.51, though shares have risen more than 13 percent from an intraday low of $433.63 earlier this month.

Some analysts highlighted strong 24 percent growth in revenue as signs that Google was weathering well a difficult economic and advertising environment.

"I was pleased with the revenue coming ahead of expectations, driven by the strength in the U.S.," said Richard Fetyko of Merriman Curhan Ford. "Even with the forex headwinds from international, they came in $100 million ahead of expectations."

(Additional reporting by Sue Zeidler, Gabriel Madway and Carolina Madrid; Editing by Edwin Chan, Gary Hill)