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Google's profit margin shrinks in Q2

Google revenues surged in the second fiscal quarter but the renowned Internet money-making machine saw profit margins narrow as it spent heavily on hiring talent and acquiring traffic.

The world's most popular online search engine on Thursday reported a 28 percent rise in second-quarter profit but the results fell far short of expectations on Wall Street where the firm's stock price sank.

Google said net profit bounded to US$925 million, or US$2.93 per share, in the period from April to last month, compared with US$721 million, or US$2.33 per share, in the same quarter last year.

Analysts had expected earnings of US$3.59 per share.

Google reported revenues of US$3.87 billion, up 58 percent compared with the second quarter of last year and 6 percent higher than the first quarter of this year.

Google said it paid US$1.15 billion to partners that direct visitors to its online properties, cutting net revenues to US$2.72 billion.

The US firm also spent heavily on hiring engineers and ad sales people.

"We ended up higher on our head count expenses than we planned and we will watch it," Google chief executive Eric Schmidt said during a conference call with analysts.

"We hired a little faster than we had planned," he said.

Google estimates that stock compensation and bonuses paid to woo or keep talent trimmed more than US$0.60 from per-share profits in the quarter.

The company's stock price was down more than 7 percent to US$509.53 per share in after-hours as Friday trading was about to commence.

Schmidt and Google cofounders Larry Page and Sergey Brin seemed unfazed as analysts pressed them about employee bonuses, litigation, and why "click" ad revenues were flat while visits to the search Web site were increasing.

"We are going to do just fine making money," Brin said.

Google said visits to its Web sites are on the rise worldwide and it expects to spend more on data centers and paying online partners.

YouTube, which Google bought last year for US$1.65 billion worth of stock, has expanded localized service to nine countries and a deal with Apple makes the Web site's videos available on popular new iPhones.

"The iPhone, of course, has amazing user experiences with YouTube," Page said. "You can waste many hours."

Page is "optimistic" about experiments YouTube is doing with technology to screen copyrighted material from the video-sharing Web site.

Two fronts on which Google is facing major legal battles stemming from copyright concerns are YouTube, and a project to put digitized versions of the world's books into an online library.

"It would be great if those would go away or somehow be resolved by technology," Schmidt said.
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