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 sap the Internet search leader.
Although Google's management maintains the company will thrive even if the economy weakens further, the results released Thursday caused Google shares to plunge more than seven per cent.
Investors were largely reacting to indications that Google is fretting about the economic climate for the first time since it went public nearly four years ago.
The red flags included a dramatic slowdown in the company's hiring pace and Google chairman Eric Schmidt's description of the economy as "challenging." Google's chief economist, Hal Varian, even participated in the company's conference call for the first time to discuss business conditions.
"That was a tipoff," said Cantor Fitzgerald analyst Derek Brown. "Economic sluggishness has entered the discussion at Google, more so than we have ever heard."
Google earned US$1.25 billion, or $3.92 per share, during the three months ended in June. That represented a 35 per cent 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 the fourth time that Google hasn't exceeded analyst expectations in its 16 quarters as a public company.
Investors expressed their dismay as Google shares plummeted $40.70, or 7.6 per cent, 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 per cent to $5.37 billion from $3.87 billion at the same time last year.
More than half the revenue -- $2.8 billion -- came international markets, helping to offset some of the economic weakness in the United States.
After subtracting commissions paid to its ad partners, Google's revenue totalled $3.9 billion -- about $30 million above the average analyst estimate.
Stanford Group analyst Clayton Moran interpreted the performance as "confirmation that there is a slowdown in Internet advertising that's affecting Google."
The trouble may stem more from reluctant consumers than advertisers. Google generally only gets paid for ads that are clicked on and that wasn't happening as frequently in the second quarter.
The number of paid clicks on the websites operated by Google and its partners during the second quarter fell one per cent from the first quarter, the first sequential downturn that the company has ever reported in the category. The 19 per cent year-over-year increase in Google's paid clicks also was the company's lowest ever.
"Consumers are being cautious in their online spending patterns, just as they are in their off-line spending patterns," Varian told analysts during Thursday's conference call.
Google's second-quarter showing could foreshadow more difficulty for rival Yahoo Inc. when it releases its results for the same period next Tuesday.
After years of earnings disappointments, Yahoo needs to post good numbers and offer an upbeat outlook to reassure its shareholders as it tries to fend off a rebellion being led by activist investor Carl Icahn. A rocky quarter would give Icahn more fodder in his effort to oust Yahoo's board at the company's Aug. 1 annual meeting so he can sell all or part of Yahoo to Microsoft Corp.
A big part of Google's earnings letdown had nothing to do with online ads.
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," Schmidt assured analysts.
Varian told analysts the company might even benefit from a "Wal-Mart effect" if rising energy and food costs prod budget-conscious consumers to search for deals more frequently online.
Long known for its free spending ways, Google appears to be watching its budget more carefully too. The company added just 448 employees during the second quarter -- the fewest hired since the fourth quarter of 2004 when ushered in 353 new workers.
Since 2004 Google has been hiring an average of nearly 1,200 workers per quarter to expand its payroll to 19,604 employees.
