Relax folks, Google isn't Yahoo

Google investors sure are a jittery bunch.

The search king disappointed Wall Street on Thursday, missing earnings expectations by 3 cents per share. After-hours traders reacted with alarm, sending the company's stock down more than 7 percent by early evening to $509.53 per share. Other Internet stocks, including Yahoo, eBay and Amazon.com, were pulled down in after-hours trading as well.

Now everyone needs to relax: Google isn't going out of business quite yet. Nor are eBay, Amazon.com or even Yahoo, for all it's well-documented problems.

So what happened? Looks like the Googlers got a little ahead of themselves with spending. Specifically, it appears the culprits were payroll and data center construction, Google Chief Executive Eric Schmidt said in a conference call with analysts. The company hired 1,548 employees during the quarter, bringing the total number of employees to 13,786.

"We overspent against our own plan in the area of head count," Schmidt said. "We will watch this closely going forward."

"The company doesn't offer guidance, so in general, the Street is flying to a large degree blind on a company that is projected to do $16-plus billion in revenue this year."

--Derek Brown
Cantor Fitzgerald analyst

Translation: we goofed. And people shouldn't forget that this isn't the first time Google has goofed. The company missed earnings expectations for the fourth quarter 2005, citing a higher-than-expected tax rate. The stock fell more than 9 percent in after-hours trade.

But the company that can actually make a mistake or two more then bounced back from that hiccup. This most recent quarter? It's hard to even call it a hiccup, unless you're buying into the overheated expectations on Wall Street.

Total revenue rose 58 percent from the same quarter a year ago to $3.87 billion on continued strength in its core search advertising business. Excluding traffic acquisition costs, or commission paid to content partners, revenue was $2.72 billion, $40 million higher than what analysts were expecting.

Google's net income for the quarter was $925 million, or $2.93 a share, up from $721 million, or $2.33 a share, a year earlier. Excluding one-time items such as employee stock-based compensation, income was $1.12 billion, or $3.56 a share, compared with $925 million, or $2.93 a share, a year ago. But that was 3 cents less than what analysts were expecting, hence the after-hours hyperventilation.

"There seems to be an overreaction," said Derek Brown, of Cantor Fitzgerald, in a considerable underreaction.

You could blame Google, in part, for this response. Because its executives don't provide a forecast, minor stumbles like this can have a disproportionate impact. "The company doesn't offer guidance, so in general, the Street is flying to a large degree blind on a company that is projected to do $16-plus billion in revenue this year," Brown said.

But not all Wall Street analysts were disappointed. "Google did better than I expected and better than what any reasonable expectation should have been," Steve Weinstein of Pacific Crest Securities said. "The fundamentals are remarkable when you consider the overall industry and their share in that market."

By contrast, Google's main rival Yahoo saw its second-quarter earnings drop from a year ago on slowing growth in its display advertising business. Yahoo, which had a management shakeup last month that led to co-founder Jerry Yang replacing Terry Semel as chief executive, also warned that revenue for the rest of the year would be lower than expected.

Google continues to expand its search market share. Google has 52.7 percent share of the searches in the U.S., compared with Yahoo's 20.2 percent and Microsoft's 13.3 percent, according to Nielsen/NetRatings.

Not everything is perfect at the Googleplex, of course. The company has proposed a $3.1 billion cash acquisition of online ad company DoubleClick, which would give it a needed boost in the display advertising market. The U.S. Federal Trade Commission is investigating antitrust concerns with the deal, voiced by companies like Microsoft and AT&T. And consumer groups say the acquisition poses privacy concerns because of the amount and types of consumer Web data Google would have access to.

Google also faces copyright lawsuits over its book-scanning project and pirated videos that have appeared on its YouTube viral video site. "It would be great if those would go away," Schmidt said.

The company is experimenting with a system that will allow copyright holders to get their content removed from YouTube quickly, said co-founder Sergey Brin. "We're optimistic we will be able to deploy that widely in the next year," he said.

So Brown has same good advice for the nervous night-trading crowd: "Don't lose the forest for the trees."

[SnidleyWhiplash]

Um, Yahoo isn't even Yahoo...

I realize that Yahoo is a favorite whipping boy of the media and analysts, but things are even as bad at Yahoo as the depressed stock price would suggest. Yahoo suffers from being the ugly older kid to Google as the cute newborn that everybody oohs and ahhs over. Even Google's poo is less stinky and somehow adorable. Google's fall is coming, maybe this is the beginning, maybe not. But when the bloom falls off the rose, it's gonna get really ugly as all those Priuses hit the streets looking for work.

[orfeu_niko]

Don't say that!!!

Are you crazy. Google is God's answer to our prayers! Them and Apple.

[WJeansonne]

Are you a Google shill?

Are you trying to prop up Google for some reason. Perhaps you own stock in the company? It's just like any other company, it's not some manna from heaven.

[Cyrus_K]

Reason for pressure on Google is Anoox

I think the reason that you are seeing some pressure on Google sales is Anoox search engine. After all Anoox beats Google &#38; Yahoo on 2 Key areas:<br /><br />1- Anoox fundamentally delivers the better search results since its results are driven by the knowledge of the people, that is YOU and me. And I say people (US) are much more intelligent than Google &#38; Yahoo machines. They explain it better here:<br /><a class="jive-link-external" href="http://www.anoox.com/voting_overview.jsp" target="_newWindow">http://www.anoox.com/voting_overview.jsp</a><br /><br />2- Cost of Advertising on Anoox is much lower than Google or Yahoo since Anoox is a not-for-profit type of business. In fact we advertise on Anoox<br />and we have cut the cost of our Advertising by like 50% over last year, that is real saving for me as a small business owner which I appreciate alot.<br /><br />So when you put the above 2 Key advantages that Anoox has I think it is only expected that more &#38; more people &#38; businesses will gravitate to AnooX.<br /><br />Also Anoox has an excellent Affiliate program. I can tell you that as a fact since we are also an Anoox affiliate and we have been making excellent <br />pay-outs from our Affiliate relation with them.

[xsmillions]

Well you get points for name dropping...

I assume that's part of their affiliate program? To consider that a third tier search provider is putting any pressure on this situation is tenuous at this point. <br /><br />In test driving the site, its "better search results...driven by...people like you and me" missed fundamental sources in 12 different search areas that I checked, ranging from tech to psychology to children's literature. <br /><br />Secondly, I would be curious to know who the 'we' is that advertises on Anoox and what your criteria for "excellent payouts" actually is, in terms of actual sales, page views and net revenue generated. Cost of advertising in and of itself is irrelevant...net revenue is much more important if you're trying to make a business case for spending dollars on a relatively obscure source.<br /><br />I took the time to actually contact a number of people I know (roughly 30) whose livelihood is based in SEO and/or web-based search, and only 2 had more than an anecdotal knowledge of the company. Both work for web-based companies with revenue in excess of $600m, and neither considered the traffic levels from Anoox to be significant enough to justify the effort of advertising with them. (No, neither works for Google, Yahoo!, Ask.com, or any MS division... :) They also found the actual search results generated to be less useful than the Google and Yahoo options you mention. Granted, this isn't a statistically significant sample; I point it out merely to temper your insinuation of Anoox's relevance at this point in time.<br /><br />From a conceptual standpoint, I personally like the spirit behind their idea. However, the opportunity to massively skew and distort their results is, at least, profound by all appearances I can find. Without being able to determine the criteria that a specific person uses to rank a site, I think I'll personally have to pass. <br /><br />So you get points for giving them a warm fuzzy by mentioning them in the same sentence as Google. As for the presumed superior intelligence in generating searches, I would recommend directing it toward something more constructive than shilling.

[LuvThatCO2]

You're right - Yahoo can at least make good apps

More and more I find myself using Yahoo maps over Google maps, Yahoo's mail over gmail, etc.<br /><br />When it comes down to it, you're right, Google isnt Yahoo. Yahoo makes good web apps. And other than a search engine, google really hasnt created anything groundbreaking. Google Earth? They bought that. Google maps? others are better. GMail? meh.

[niravabhavsar]

Google can't be Yahoo!

yahoo is a fav. whopping boy for everyone. But, the fact is the very topic of search is subjective. In an experiment I have started using Yahoo for last 3 months as search engine switching from google. And, I haven't seen a topic where I haven't gotten a correct search result on first 3 listings. Frankly, I have started to believe now that yahoo search is as good as google if not better. And, when it comes to maps, news, im, finance, mail and personalized pages; yahoo is way better than google in almost all properties. Take example of yahoo image search with flickr vs google image search with picasa. Feel free to go to my blog on Yahoo 360 here to see comparison. <a class="jive-link-external" href="http://blog.360.yahoo.com/bhavsar_nirav" target="_newWindow">http://blog.360.yahoo.com/bhavsar_nirav</a>. And, relax I don't make money out of my blog and not here to promote it.