Google misses second-quarter earnings — who's taking the fall?


Success has many fathers; failure is an orphan. Or so the saying goes. Google's second-quarter earnings — how to put this delicately? — sucked. At least compared to Wall Street's predictably overhyped expectations. Profits rose 28 percent, but that wasn't enough, and the stock fell 5 percent in after-hours trading, which means someone's got to take the fall. I dialed into Google's conference call, and listened closely to who did most of the talking. When it's bad news, the chief financial officer usually gets stuck with the unpleasant job, and sure enough, that's what happened, with CEO Eric Schmidt quickly handing the call over to CFO George Reyes and flipping tough questions to his colleagues. That tells me even Google insiders thought it was a bad quarter, too. Also on the call: Google cofounders Larry Page and Sergey Brin and top executives Jonathan Rosenberg and Omid Kordestani.

2:27 p.m. Pacific Gene Munster of Piper Jaffray, the analyst who's drawn a fake blog of his own, gets the last question, asking about Google's efforts in China. Schmidt uses his favorite word, "accelerating," to describe Google's place in the market. He also mention's Google's "tenacity." Translation: It's going to take years for Google to improve its market share in China significantly. And with that, the call wraps up.

2:19 p.m. Pacific "There are lots and lots of rumors, which is always very exciting," says Eric Schmidt. He's talking about Google's wireless plans, of course, but I'm strongly considering repurposing it as a Valleywag blurb.

2:16 p.m. Pacific Was the headcount cost primarily driven by sales hires? Kordestani talks about a reorganization of the salesforce to get them to sell more than just search ads. That's got to be expensive, and a reorganized salesforce is usually less productive. This might explain some of Google's overhiring and the resultant earnings miss.

2:11 p.m. Pacific Omid Kordestani, Google's top sales executive, appears to be a convert to the cult of "conversational marketing," claiming that YouTube allows for "two-way conversations." Sure, if you consider juvenile YouTube comment threads to be a form of conversation.

2:08 p.m. Pacific Did a Google executive on the call just belch? Seriously, people. It's an earnings call. Have some respect.

2:02 p.m. Pacific Schmidt dodges a question about why paid clicks are flat, dumping the question in SVP Jonathan Rosenberg's lap. Rosenberg claims that paid click growth was hurt by seasonality. Which is it? Seasonally flat, or accelerating? Brin pops in and adds that tweaks to make ads more targeted also kept the growth down.

2:00 p.m. Pacific Eric Schmidt takes over again, trying to wrap up by claiming that Google's growth is "accelerating." Really? Even for a Ph.D. in computer science, apparently, math is hard.

1:58 p.m. Pacific Page starts talking about how Google works with software developers. Sadly, unlike manic Microsoft CEO Steve Ballmer, he does not start yelling, "Developers, developers, developers, developers, developers!"

1:56 p.m. Pacific Cofounder Larry Page takes over from Brin. Even he can't resist teasing Brin about searching for 1960s IBM equipment. He's talking about YouTube's partnership to put videos on the iPhone, and he says, "You can waste very many hours and also enjoy useful content like mainframe videos [on the iPhone]."

1:54 p.m. Pacific Just as Google started disclosing "paid clicks," a measure of the size of its advertising business, Brin reveals that it's now allowing advertisers to buy pay-per-action ads — in other words, paying Google for ads by the lead or sale. Curious if the company will start disclosing the number of actions, too.

1:51 p.m. Pacific Brin talks up two of Google's worst-named products: iGoogle, a personalized homepage, and Gadgets, customized content modules that appear on iGoogle. (Most people in the industry call those modules "widgets," which makes Brin's peculiar parlance for them annoying.)

1:48 p.m. Pacific Now Sergey Brin takes the horn. He talks up "universal search," which is the technology by which Google gives its own products — YouTube, Google Maps, and so on — privileged positions in Google's search results. He describes how he found a YouTube video about a 1960s IBM mainframe as an example of how mainstream consumers will benefit. Rrrrrright.

1:46 p.m. Pacific It almost sounds like CFO George Reyes is breathing a bit heavily. Everything okay, George? I didn't think things were that bad. A deep breath right after he gives Google's new headcount figure: 13,748 Googlers.

1:41 p.m. Pacific Schmidt fesses up: Google has overhired, causing costs to rise. He says the company is going to be watching headcount going forward. Google, no longer Silicon Valley's hiring machine? That's a frightening thought. Or perhaps comforting for startups trying to recruit engineers. Sure enough, Schmidt wraps up his comments in record time and hands the call to Reyes, who has to dissect the bad news for analysts and investors.

1:39 p.m. Pacific Eric Schmidt begins his comments. He's hesitant and stumbles a bit before trying to claim that the results were "strong." The most positive thing he says is that Google's main search website performed well. What he doesn't get to right away: Paid clicks, the way Google makes moeny from advertising, were stagnant from the first quarter to the second quarter.

1:37 p.m. Pacific Call is starting. On the call: CEO Eric Schmidt, CFO George Reyes, cofounders Larry Page and Sergey Brin, and top executives Jonathan Rosenberg and Omid Kordestani. It's the usual crew for a Google earnings call.

1:35 p.m. Pacific Want to know why Google missed earnings? Look no further than its operating expenses, which mostly consist of payroll and data-center costs. They're now 31 percent of revenue, up from 27 percent in the first quarter. That's a big jump, percentage-wise. Operating expenses grew by about 25 percent, while revenues only grew 6 percent quarter-over-quarter. Scary. Expect Wall Street analysts to start talking about how Google needs to get its costs under control.

1:27 p.m. Pacific Waiting for the call to start. Google's revenues? $3.87 billion. Or as Dr. Evil might say, "Three point eight-seven BILLLLLLION DOLLARS!" Of course, I'm not comparing Google to Dr. Evil. Google actually paid out more than $1 billion to its AdSense distribution partners. You know that's funding a lot of Web 2.0 keggers.