Google Inc's quarterly profit beat Wall Street expectations, but the weak economy and slump in advertising spending took a toll on revenue growth and the price of its search ads.
Shares of Google fell 3 percent after the results, which exceeded average forecasts but failed to live up to the heightened expectations of investors following Intel Corp's strong earnings earlier this week. Google shares have risen 4 percent since Intel's report on Tuesday.
They did decently, but obviously it's not high enough for the Street, said Laxmi Poruri, an analyst at Primary Global Research.
Google's revenue in the second quarter rose 3 percent to $5.52 billion, compared with the average analyst forecast of $5.49 billion, according to Reuters Estimates.
Excluding traffic acquisition costs -- the portion of revenue that is shared with Google partners -- revenue was $4.07 billion.
People were hoping they would see something around the $4.3 billion range, said Brigantine Advisors analyst Colin Gillis. Google is changing from a topline growth story to an earnings expansion story.
Google, the largest U.S. Internet search engine, has weathered the global recession better than many of its rivals from Yahoo to Time Warner Inc's AOL, which have suffered declining revenue in recent quarters.
In a conference call on Thursday, Google executives said it was too early to tell when an economic recovery would emerge, but stressed their own business had begun to stabilize.
A quarter ago we had no idea where the bottom was, Google CEO Eric Schmidt said.
He noted business had picked up in the online shopping and travel categories that Google sells ads for. Sales chief Nikesh Arora said large advertisers have come back to the table.
The cost per click -- the amount of money advertisers pay for a click on an ad -- fell roughly 13 percent year-over-year, but rose 5 percent from the previous quarter, Google said.
Headcount for the Mountain View, California company declined by 378 employees to 19,786 full-time staffers in the second quarter, part of which was due to the previously announced plan to lay off 200 sales and marketing workers.
Google spent $139 million on capital expenditure in the second quarter, compared with $698 million in the second quarter of 2008.
Excluding special items, Google earned $5.36 a share in the second quarter, ahead of the $5.08 per share expected by analysts, according to Reuters Estimates.
It posted net income of $1.48 billion, or $4.66 a share, versus $1.25 billion, or $3.92 a share, a year ago.
The company also benefited from a lower income tax rate of 20 percent, compared with the first quarter's 25 percent.
If you take a step back, the top line was a bit light of where the raised expectations were, but in line with the Street. Margins were in line. Performance in the U.S. was in line and international was where the upside came from, said Ross Sandler, analyst at RBC Capital Markets.
Revenue from outside the United States accounted for 53 percent of total revenue.
Analysts say Google's search-based advertising model is still the best in the business, but it has never been tested to this degree. It faces a slump in advertising spending due to the weak economy, and a resurgent rival in Microsoft Inc , whose Bing search engine won early favor.
Bing 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, but Google maintained its 65 percent share, while Yahoo Inc's fell 0.5 percent to 19.6 percent.
But Google CFO Patrick Pichette said in an interview that the company had not seen any material impact to its business since Bing launched.
There's a reason why Google is in the lead, because (search is) its core business and that's what it does very well, Pichette said.
Google executives also said the YouTube video site which it acquired for $1.65 billion in 2006 would become profitable in the not too distant future.
As usual, the company did not provide a financial outlook.
Google said the number of clicks on the ads that run alongside its search results, dubbed paid clicks, increased 15 percent year-over-year in the second quarter, a slight deceleration from the 17 percent clip in the first quarter.
Shares of Google fell to $427.80 in after-hours trade on Thursday, from their Nasdaq close of $442.60. The stock had risen about 9 percent in the past three months, compared with a 3 percent increase in the Dow Jones industrial average.
It doesn't seem like things are turning around per se. But the revenue per click -- an indication of advertisers' appetite for clicks and for advertising -- was up sequentially, so you can assume that in terms of ad budgets out there, we probably reached a bottom some time in the first quarter, said Richard Fetyko, managing director of Merriman Curhan Ford.
What we need now is rebound in consumer spending.
(Additional reporting by Anupreeta Das and Laura Isensee; Editing by Steve Orlofsky, Tiffany Wu and Carol Bishopric)