•Google's Sales Growth Slows Amid Slump in Web Advertising; Shares Decline

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Google’s Sales Slow Amid Slump in Online Advertising (Update3)
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By Brian Womack

July 16 (Bloomberg) -- Google Inc., owner of the world’s most popular search engine, reported slower second-quarter sales growth after the recession crimped the price of online ads. The shares fell 3.3 percent in late trading.

Revenue rose 2.9 percent from a year earlier, down from growth of 6.2 percent in the first quarter. The average cost of Google ads fell 13 percent from a year ago, the Mountain View, California-based company said today in a statement.

Internet advertising spending, Google’s main source of revenue, is flagging as companies pare back budgets. The market’s growth may slow to 10 percent globally this year, down from 22 percent last year, according to ZenithOptimedia Group in London. Google’s dominant search engine also faces fresh competition from Microsoft Corp.’s Bing.

“The likelihood is that the economy is going to continue to temper Google’s business,” Clayton Moran, a Boca Raton, Florida-based analyst with the Benchmark Co., said in an interview. “The big numbers are good, the inner metrics are slightly disappointing.”

Google, based in Mountain View, California, dropped $14.79 to $427.81 in late trading after the results were announced. The shares, up 44 percent this year, closed at $442.60 on the Nasdaq Stock Market.

‘Relative Stability’

“We saw relative stability in our business in the second quarter -- too early for us to tell when the recovery materializes,” Chief Executive Officer Eric Schmidt said on a conference call.

Clicks on Google ads declined about 2 percent from the previous three months, the company said.

Excluding sales passed on to partner sites, second-quarter revenue was $4.07 billion, compared with an average estimate of $4.06 billion in a Bloomberg survey of analysts.

Net income rose 19 percent to $1.48 billion, or $4.66 a share, from $1.25 billion, or $3.92, a year earlier. Leaving out some expenses such as stock compensation, profit was $5.36 a share, beating the $5.08 estimated by analysts in the Bloomberg survey.

Google made $139 million in capital expenditures, including spending on data centers, down more than 80 percent from a year earlier. Operating cash flow dropped to its lowest level in two years. The company made hundreds of millions of dollars in tax payments last quarter, eating into cash flow, Chief Financial Officer Patrick Pichette said on a conference call.

Job Cuts

To cope with the slump, Google is taking a tougher line on expenses. In March, the company cut about 200 sales and marketing employees, or 1 percent of its workforce. Google also shut down underperforming businesses, including its newspaper and radio advertising units.

The company may get a boost from its YouTube unit, the top video-sharing site. Pichette said he’s optimistic that YouTube could be profitable in the not-too-distant future. The company is selling more advertisements on YouTube’s home page and before video clips.

James Friedland, an analyst with Cowen & Co. in New York, said the company is building a good business model for YouTube.

“It sounds like they have really figured out how to monetize the site,” said Friedland, who rates the stock “outperform” and doesn’t own it. “They actually are making meaningful progress.”

Being ‘Prudent’

Google reduced the number of full-time employees to 19,786 last quarter, from 20,164 at the end of March. The company has trimmed some perks as well, Pichette said at an investor conference in June. Google closed some employee cafes and eliminated free water bottles. The company continues to be “prudent” about its costs, he said at the time.

Microsoft, which released its Bing search engine in June, is counting on the program to reverse five years of market-share losses to Google. Microsoft ranks third in the U.S. search market, behind Yahoo! Inc., according to ComScore Inc., a research firm in Reston, Virginia.

Microsoft, based in Redmond, Washington, increased its U.S. market share to 8.4 percent last month, from 8 percent in May, ComScore said. Google’s share was unchanged last month at 65 percent. Sunnyvale, California-based Yahoo’s share of searches dropped to 19.6 percent in June from 20.1 percent.

International Sales

Google’s second-quarter revenue from outside the U.S. was $2.91 billion, accounting for 53 percent of sales, up from 52 percent the previous quarter. Sales of ads on its own sites were $3.65 billion, while revenue from partner sites was $1.68 billion.

Online advertising is still outpacing print and television ads. The overall ad industry may shrink 8.5 percent this year, according to ZenithOptimedia.

“The issue here has been marketers pulling their marketing budgets down or marketers going out of business,” said Youssef Squali, an analyst with Jefferies & Co. in New York. He recommends buying the shares, which he doesn’t own personally. “The consumer is just not spending any money.”

Google is seeking fresh ways to attract users to its search engine and other online services.

Earlier this month, the company said it would offer computer makers a free operating system called Chrome OS. The software, available next year, will be designed for users who go to the Web to work on documents, calendars and e-mail. That contrasts with Microsoft’s traditional approach of keeping most software on personal-computer hard drives.

To contact the reporter on this story: Brian Womack in San Francisco at Bwomack1@bloomberg.net
Last Updated: July 16, 2009 19:03 EDT

 

time to short their hyperinflated stock!

 

Eric Schmidt is not the sharpest tool in the shed.
I wonder how he got that position in the first place.

SELL, SELL, SELL.