San Francisco - Google revenues surged in the second fiscal quarter but the renowned internet money-making machine saw profit margins narrow as it spent heavily on hiring talent and acquiring traffic.
The world's most popular online search engine on Thursday reported a 28% rise in second-quarter profit but the results fell far short of expectations on Wall Street where the firm's stock price sank.
Google said net profit bounded to $925m or $2.93 per share in the April-June period, compared with $721m or $2.33 per share, in the same quarter last year.
Analysts had expected Google's earnings of $3.59 per share.
Google reported revenues of $3.87bn, an increase of 58% compared with the second quarter of 2006 and six percent higher than the first quarter of 2007.
Google said it paid 1.$15bn to partners that direct visitors to its online properties, cutting net revenues to $2.72bn.
The US firm also spent heavily on hiring engineers and ad sales people.
"We ended up higher on our head count expenses than we planned and we will watch it," Google chief executive Eric Schmidt said during a conference call with analysts. "We hired a little faster than we had planned."
Google estimates that stock compensation and bonuses paid to woo or keep talent trimmed more than 60c from per-share profits in the quarter.
The company's stock price was down more than seven percent to $509.53 per share in after-hours as Friday trading was about to commence.
Schmidt and Google co-founders Larry Page and Sergey Brin seemed unfazed as analysts pressed them about employee bonuses, litigation, and why "click" ad revenues were flat while visits to the search website were increasing.
"We are going to do just fine making money," Brin said.
Google said visits to its websites are on the rise worldwide and it expects to spend more on data centers and paying online partners.
YouTube, which Google bought last year for $1.65bn worth of stock, has expanded localised service to nine countries and a deal with Apple makes the website's videos available on popular new iPhones.
"The iPhone, of course, has amazing user experiences with YouTube," Page said. "You can waste many hours."
Page is "optimistic" about experiments YouTube is doing with technology to screen copyrighted material from the video-sharing website.
Two fronts on which Google is facing major legal battles stemming from copyright concerns are YouTube, and a project to put digitised versions of the world's books into an online library.
"It would be great if those would go away or somehow be resolved by technology," Schmidt said.
Google said a falling out with eBay that prompted the online auction website to pull advertising has not affected the search engine's bottom line.
Schmidt refused to comment on industry speculation that Google is working on a mobile telephone of its own.
"We don't comment on rumours and there are lots of rumours," Schmidt said. "We have looked carefully at wireless and are thinking very carefully about what we want to do there."
Google said it has invested heavily in China and is gaining market share there.
"We are not number one (in China) but our statistics show we are doing better," Schmidt said. "We think the strengths Google brings to the party will lead to significant victories in China in coming years."
Google said a reason that income from advertising didn't rise with user visits is that it is gaining popularity in developing markets where ad rates are lower.