PREVIEW-Google faced rougher landscape in second quarter
* Google Q2 revenue seen up 2.3 pct year-over-year
* Options trade imply 7 pct plus/minus move on results day
* New trademark ad policy could boost revenue per click
* Earnings due on Thursday
SAN FRANCISCO, July 15 (Reuters) - Wall Street expects Google Inc (GOOG.O) to report tepid revenue growth for the second quarter on Thursday amid a tough advertising market and a sharpened attack on its business by rival Microsoft Inc (MSFT.O).
Analysts will be looking for updates on both fronts as they gauge the Internet giant's progress toward recapturing the double-digit sales growth it once enjoyed.
While analysts believe Google's search-based advertising model remains the best in the business, some say it has never been tested to this degree.
"Google can't stimulate demand," said Oppenheimer analyst Jason Helfstein. "All they can do is try to monetize the demand that's out there."
Helfstein expressed concern that Google could miss certain Wall Street targets, such as U.S.-based revenue, but he also said the second quarter could represent the company's low point in this economic downturn.
Analysts on average expect Google to report revenue of $5.49 billion for the quarter, up about 2.3 percent from nearly $5.37 billion a year earlier, according to Reuters Estimates.
The analysts' average forecast calls for earnings per share of $5.08, excluding certain items, compared with $4.63 a year earlier.
Shares of Google are up roughly 9 percent in the past three months, outperforming gains of 2.8 percent for the Dow Jones Industrial Average .DJI and 7.8 percent for the Nasdaq Composite .IXIC.
Goldman Sachs derivative strategists estimate Google's options imply a 7 percent stock move, up or down, on earnings day, compared with a median realized move of 6 percent over the past eight quarters.
"Overall, the option sentiment appears moderately bullish into Google earnings judging by the amount of option contracts outstanding and the order flow," said Henry Schwartz, president of option analytics firm Trade Alert.
PAID CLICKS
Investors will scrutinize any increase or decrease in Google's paid clicks, following the 17 percent year-over-year rise in the first quarter.
The final month of Google's second quarter will include extra competition from Microsoft, which launched a revamped search engine called Bing and backed it with a $100 million marketing campaign in June.
Bing has boosted Microsoft's share of the U.S. search market to 8.4 percent in June from 8.0 percent in May, according to comScore. Google maintained a 65 percent share, while Yahoo Inc's (YHOO.O) fell half a percentage point to 19.6 percent. [ID:nN15335158]
Bing's long-term impact on Google's business is unclear. Cowen and Co analyst Jim Friedland noted that search query share is not the same as search advertising share, as advertisers may not yet have shifted ad dollars to Bing in its first month of existence.
And he said Bing's share gains could diminish after the novelty wears off.
"The real test for Bing is when Microsoft stops spending on advertising," Friedland said.
Search is one of several areas where Google and Microsoft are stepping up competition. This week, Microsoft unveiled a free, online version of its Office productivity software that competes with Google Apps.
Meanwhile, Google plans to take on Microsoft Windows with an operating system called Chrome, which will be Web-based.
For Google, developing new products to battle Microsoft and defend its turf could mean higher spending, Oppenheimer's Helfstein wrote in a recent note to investors.
Google is also tweaking its ad system. In May, it lifted restrictions on the use of trademarked terms in search ads and began allowing advertisers in 190 countries outside the United States to bid on trademarked keywords that act as the triggers for their own ads.
Analysts believe advertisers had bid less money on search terms that their ads appear alongside during the first quarter.
According to Canaccord Adams analyst Jeff Rath, the ability to use trademarked terms will create significant upward pricing pressure on certain high-volume search words and could be "very material" to the amount of revenue that Google gets per click. (Reporting by Alexei Oreskovic in San Francisco and Doris Frankel in Chicago; Editing by Lisa Von Ahn)
