Google Tanks on Unexpected Margin Drop

Google shares were down 7.5% in AH trading after the company said second-quarter earnings fell just short of analyst estimates, while profit margins missed expectations by over four basis points. Net income jumped over 28% to $925.1 million ($2.93/share), up from $721.1 million ($2.33) a year ago, while revenue surged 63% to $2.72 billion. Excluding stock options costs EPS were $3.56, shy of analyst consensus estimates of $3.59/share, while revenues were slightly ahead of analyst calls of $2.68 billion. In a note to clients, Citigroup analyst Mark Mahaney said Google's negative margin trends were the key issue. Pro-forma operating income was about $1.35 billion (50% margin) vs. estimates of $1.45B (54.4%). Year-over-year, its margins have dropped five basis points. In 10 of its 11 previous quarters as a publicly-traded company, Google has beaten estimates. Google continues to dominate the search market, cornering 52.7% of all U.S. search queries in June, up from 49.4% y/y. Rival Yahoo saw its market share drop from 23% to 20.2%. "Our performance once again demonstrates the strength of our core search and ads business," said CEO Eric Schmidt. The other time Google missed was in January 2006. At the time shares tanked 15%, in what later proved to be a buying opportunity. Google is holding an earnings conference call at 4:30 ET (see Google Earnings Call Transcript (later today)).

Sources: Press release, MarketWatch, Bloomberg, TheStreet.com
Commentary: Google Expecting Yet Another Stellar Growth Quarter • Analyst Predicts The FTC Will Block Google’s Acquisition Of Doubleclick • Google Gets Over 75% Of Search Spending In Q2
Stocks/ETFs to watch: Google Inc. (GOOG). Competitors: Microsoft Corp. (MSFT), Yahoo! Inc. (YHOO), News Corp. (NWS)

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