July 19, 2007 / 8:45 PM / 13 years ago

Google profit disappoints on expenses

SAN FRANCISCO (Reuters) - Web search leader Google (GOOG.O) reported on Thursday disappointing earnings on a recent jump in operating expenses, depressing its stock 7 percent.

Net profit rose 28 percent as Google gained market share, but the gains were offset by a rise in costs for adding staff.

“The story is they’ve blown it on expense ... Operating expenses were much higher than everyone was expecting,” said Jeffrey Lindsay, analyst at Sanford C. Bernstein, adding that “these guys have been spending like drunken sailors.”

Shares of Google fell to $511 in after-hours trade, down from a close of $548.59 in regular session trade on Nasdaq.

Google said second-quarter net income rose to $925 million (451 million pounds), or $2.93 a diluted share, compared with the year-ago quarter’s $721.1 million, or $2.33 per share. On a sequential basis, second quarter net income dropped from the $1 billion reported in the first quarter of 2007.

Excluding one-time items and stock option expenses, Google posted a profit of $1.12 billion or $3.56 per share. That was 3 cents per share short of Wall Street targets.

Gross revenue rose 58 percent to $3.87 billion — matching Wall Street’s consensus forecast. Revenue included $1.15 billion in payments to affiliated Web sites who run Google Web search advertising, known as traffic acquisition costs.

Revenue forecasts ranged between $3.77 billion to $3.97 billion, according to Reuters Estimates. Google declines to provide financial guidance to Wall Street.

“It seems a little bit light from a profitability perspective, which is something we want to dig into a little bit more after the call,” said Derek Brown, analyst at Cantor Fitzgerald. “The company continues to execute at a very high level.”

Operating expenses were $1.21 billion for the quarter, accounting for 31 percent of revenue, compared with $972 million in the first quarter, or 27 percent of revenue.

Other expenses, including the costs of operating its computer data centres, credit card processing costs and the cost of acquiring programming, jumped to $412 million from $345 million in the first quarter of 2007. These costs represented 11 percent of revenue from 9 percent earlier this year.

Additional reporting by Michele Gershberg in New York

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