Strong Google Revenue Disappoints Investors But May Ease Antitrust Scrutiny - InformationWeek

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Strong Google Revenue Disappoints Investors But May Ease Antitrust Scrutiny

Performance was driven by the core search and ads business, the company said. But Microsoft is gaining market share, and regulators may soon have Google under the microscope.

Google Inc. on Thursday reported $3.87 billion revenue for the quarter that ended June 30, 2007, up 58% from the same quarter last year, and 6% from the previous quarter. Traffic acquisition costs during this quarter came to $1.15 billion, or 30% of advertising revenues.

"Our performance once again demonstrates the strength of our core search and ads business," said Eric Schmidt, CEO of Google, in a statement. "The growth in our global traffic combined with our ongoing improvements in monetization resulted in solid revenue growth, even in a seasonally slow quarter."

Investors, having become accustomed to more explosive growth from Google, sold shares in after-hours trading, pushing the share price down more than 7% by 6:00 P.M. EST.

Schmidt noted that Google continues to expand its efforts to sell hosted applications to businesses, even as it works to improve Google for its users around the world.

Questioned during an investor conference call about whether anyone at the company was concerned that selling software-as-a-service to corporate customers would dilute the company's high-margin online ad business, Google co-founder Sergey Brin said he wasn't concerned about that. "We don't think about it that way," he said. "We're going to do just fine making money."

Google-owned sites generated $2.49 billion, or 64% of total revenue. Revenue generated on Google's partner sites, through its AdSense programs, accounted for $1.35 billion, or 35% of total revenue.

While AdSense revenue increased 36% from same quarter last year, it was flat compared to Q1 2007. During the investor conference call, Google CFO George Reyes attributed the lack of growth in part to the removal of "low-quality" publishing partners -- a euphemism for spammers.

An area of potential concern: Google's operating expenses rose more quickly than the company expected, partially due to its rising headcount and bonuses.

"We overspent against our own plan, in the area of headcount," Schmidt told investors on the conference call. Google added 1540 employees during the quarter, mainly in sales, marketing, and engineering, for a total headcount of 13,786 at the end of the quarter. Schmidt said the company will be watching headcount growth going forward.

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