Google's Hiring of Ad Folk Blamed for Missed Earnings Expectations

Says Addition of 1,548 New Staffers, Many in Marketing, Is Reason for Down Quarter

By Abbey Klaassen

Published: July 19, 2007

NEW YORK (AdAge.com) -- Google's second-quarter earnings did something that rarely happens for the search-engine giant: It missed investor expectations.

Google CEO Eric Schmidt: 'We hired a little faster than we planned. Was this a mistake or not? It was not a mistake, the kind of people we brought in are so good we're happy we did this.'

Photo Credit: James Duncan Davidson

The stock price took a 7% to 8% tumble shortly after Google announced its second-quarter earnings, which excluding traffic-acquisition costs totaled $2.72 billion, up 62% from $1.675 billion in second quarter 2006. Profit was $925.1 million, or $2.93 per diluted share, in second quarter 2007. That's up from a profit of $721.1 million, or $2.33 per share, for the year-earlier period.

Good news for ad market
The good news for the internet-advertising market is that it didn't appear to be due to a weakness in ad spending but rather an overzealous quarter of hiring.

Google blamed increased operating expenses, including a larger-than-expected headcount increase. Google CEO Eric Schmidt noted on the call that the company exceeded its "expense plan" on headcount as second quarter saw the company add 1,548 employees, the majority in sales, marketing and engineering positions, bringing the total Google workforce to 13,706.

The irony is that Google's intensive hiring has been well documented and the company's executives have lamented about the difficulty of filling their staff during the current hiring spree.

'Happy we did this'
"We overspent against our own plan in the area of headcount," Mr. Schmidt said. "We hired a little faster than we planned. Was this a mistake or not? It was not a mistake, the kind of people we brought in are so good we're happy we did this. ... We'll watch it, adjust, be opportunistic, but we'll be careful about that."

On the revenue side, Google continued to see great growth, especially within its Google-owned sites, which accounted for 64% of revenue and grew at a 74% clip. Its partner sites, meanwhile, accounted for 35% of revenue, growing at a slower 36% clip over the year ago period.

Sergey Brin, president-technology, highlighted the company's introduction of universal search, which means Google now not only presents results from the web but also shows results from video, books, images, news and maps. He also highlighted cross-language information retrieval -- more popular outside the U.S. -- in which queries search the web in multiple languages and iGoogle, the personalized Google home page.

The company didn't give any sense of how its offline sales of ads in print, TV and radio were doing, other than to say that they're a "great success."

"It's too early to see a material impact given the scales of the other side of the business," said Omid Kordestani. "We really need to first prove this model for both advertisers and publishers before we scale it. Hopefully in the next few quarters we can shed more light on this. We are seeing great success and hope to scale this."

He said the company had reorganized its sales force in the U.S. so that they can present all the products. "Every sales group is going through a lot of training," he said.