Google ad growth slows

San Francisco - Google's internet ad sales grew at their slowest rate on record during the spring, forcing the online search leader to tighten its belt another notch to propel its second-quarter profit above analyst estimates.

The performance - punctuated by revenue growth of just 3% - disappointed investors. The company's shares fell more than 3% in extended trading on Thursday after the results were released.

"Google is still facing a lot of challenges because I don't think the online ad market is out of the woods yet," said Signal Hill Capital analyst Todd Greenwald.

Because it runs the internet's most widely used marketing channel, Google's lacklustre revenue growth could foreshadow even more significant sluggishness among less profitable companies fuelled by online advertising and e-commerce. Many of those firms, including Yahoo, will detail what happened in their second quarters in the coming weeks.

Although the US recession has been making it increasingly difficult for Google to sell ads, CEO Eric Schmidt said he doesn't expect the business climate to become any more challenging.

"We're not at the moment looking at that downward spiral that we thought we might see six months ago," Schmidt told analysts on Thursday. The remarks echoed comments made to reporters last week, when he said the recession had already appeared to hit bottom.

On another positive note, Schmidt and other executives indicated Google's video site, YouTube, is on the verge of making money nearly three years after the company bought the service for $1.76bn. Google is now showing billions of ads with the videos each month, said Jonathan Rosenberg, the company's senior vice-president of product management.

Financial discipline pays off

As has been the case for years, Google gets most of its revenue through ads tied to its search engine, which controls nearly two-thirds of the US market.

The firm earned $1.48bn, or $4.66 per share, during the three months ended in June. That was a 19% increase from income of $1.25bn, or $3.92 per share, for the same period last year.

Revenue rose to $5.52bn from $5.34bn in last year's second quarter. It marked Google's lowest growth rate since the company went public five years ago. It was also the firm's second consecutive quarter of single-digit revenue growth. Google had never fallen below a 30% pace until late in 2008.

If not for stock compensation expenses, Google said it would have made $5.36 per share. That topped the average estimate of $5.09 per share among analysts polled by Thomson Reuters.

After subtracting ad commissions, Google's net revenue totalled $4.1bn - about $40m above analyst estimates.

The revenue would have been about $375m higher if the dollar had been as weak as it was a year ago, according to Patrick Pichette, Google's chief financial officer. Google's finances swing with currency fluctuations because 53% of the company's sales come from outside the United States.

Google relied on cost-cutting and an unusually low tax rate to boost its profits amid the slowing ad sales. For instance, the company trimmed its general and administrative expenses by 23% to save about $110m and reduced its spending on capital projects by 80%, or $559m.

The financial discipline resulted in the biggest quarterly reduction in Google's payroll since Larry Page and Sergey Brin started the company in a Silicon Valley garage nearly 11 years ago.

- Sapa