UPDATE 5-Google profit misses as expenses surge

* Profit ex-items 11 cents/share, misses 6 cents target

* Google investing heavily to drive future growth

* Shares fall about 4 percent

* Analysts point out good revenue growth, especially U.S.
(Adds CFO comments, earnings details)

By Alexei Oreskovic

SAN FRANCISCO, July 15 (BestGrowthStock) – Google Inc (Read more about Google Stock Analysis) (GOOG.O: )
missed Wall Street’s quarterly profit estimates for the first
time in two years after a spike in expenses offset a 24 percent
revenue jump, but it vowed to keep investing in new businesses
to drive long-term growth.

Shares of the Internet search engine leader fell almost 4
percent on worries about rising costs as it spent heavily on
research and development and hired aggressively to expand into
new products and markets in hopes of maintaining the growth
momentum Wall Street looks for.

Google eased worries that lingering economic uncertainty
from the European debt crisis could take a toll on its
business, and stressed that it planned to continue to
aggressively invest in new growth opportunities.

“They’re throwing more money into R&D than people were
expecting and a little bit less into sales and marketing,” said
BGC Partners analyst Colin Gillis. “Google has been pretty
clear that it’s going back into investment mode. They added
1,200 people in the quarter, which means more expenses are
going to kick in in September.”

Google said the spending was concentrated on a handful of
initiatives it believes could grow into billion-dollar
businesses, providing diversification from the search
advertising that now accounts for the lion’s share of revenue.

Finance Chief Patrick Pichette cited Internet display
advertising and the nascent smartphone advertising market as
some of the key areas for investment, and defended the spending
amid the economic uncertainty.

“It’s while everybody is cautious that you need to pounce,”
Pichette said in an interview with Reuters on Thursday.

Pichette added that Google, which generated 52 percent of
its second-quarter revenue outside the United States, has not
suffered any ill effects amid as investors fear that an
economic slowdown could crimp advertising spending.

Some analysts said headwinds from weakening foreign
currency — in particular the embattled euro — did not hurt
revenue growth as much as anticipated. According to its
statement, second-quarter revenue would have been $176 million
if forex rates had remained constant from the first quarter.

“In our results and in our business we have seen no impact
of the current turmoil of the economic environment,” said
Pichette.

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Graphic of expectations/results:

http://link.reuters.com/myr77m

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PAYROLL BALLOONING

Thursday’s results were a rare outright earnings miss —
Google’s first since the second quarter of 2008.

The world’s No. 1 search engine posted net income of $1.84
billion, or $5.71 a share, in the second quarter — up from
$1.48 billion, or $4.66 a share, in the year-earlier period.

Excluding items, Google’s EPS was $6.45, below the average
estimate of $6.52, according to Thomson Reuters I/B/E/S.

The company has made a number of major strategy shifts this
year, including the decision to stop censoring search results
in China — a move analysts say has contributed to the more
than 20 percent decline in Google’s stock this year.

While it announced last week that its license to operate a
website in China was renewed for a year, Google did not address
that during Thursday’s earnings call other than to say that
revenue from the country in the second quarter was “decent” but
remained immaterial to the company.

More immediately, Google is increasingly pitting itself
against rivals beyond Yahoo Inc (YHOO.O: ) and Microsoft Corp
(MSFT.O: ), as it ventures into smartphone operating systems,
mobile advertising and other areas in search of future growth.

Executives highlighted a three-fold jump in searches made
on phones running Google’s Android operating system as a sign
of the platform’s growing market traction.

To compete with the likes of Apple, Google made a string of
acquisitions in recent months and added 1,184 employees to its
payroll during the second quarter for a total of 21,805.

That spending spree contributed to a 22 percent
year-on-year jump in operating expenses in the second quarter
and took a toll on the bottom line, according to analysts.

“The question is going to be, how much money are they going
to have to be putting in for new initiatives?” asked UBS
analyst Brian Pitz.

Net revenue, which excludes costs that Google shares with
website partners, was $5.09 billion, above the $4.98 billion
expected by analysts polled by Thomson Reuters I/B/E/S.

Shares in Google fell to $474.50 after closing at $494.02
on Nasdaq.

Some analysts highlighted strong 24 percent growth in
revenue as signs that Google was weathering well a difficult
economic and advertising environment.

“I was pleased with the revenue coming ahead of
expectations, driven by the strength in the U.S.,” said Richard
Fetyko of Merriman Curhan Ford. “Even with the forex headwinds
from international, they came in $100 million ahead of
expectations.”
(Additional reporting by Sue Zeidler, Gabriel Madway and
Carolina Madrid; Editing by Edwin Chan, Gary Hill and Richard
Chang)

UPDATE 5-Google profit misses as expenses surge