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Google Revenue Growth Slows

Net income for the second quarter of 2008 was $1.25 billion, down from $1.31 billion in the first quarter of 2008.

Google shares fell in after-hours trading following a second-quarter earnings report that didn't match analysts' expectations.

The search company on Thursday reported second-quarter revenue of $5.37 billion, a 39% increase compared with the company's second quarter in 2007 and a 3% increase compared with the $5.19 billion the company reported for its first quarter of 2008.

That wasn't enough for investors accustomed to the 50% to 60% growth in quarterly revenue seen in 2007.

"Strong international growth as well as sustained traffic increases on Google's Web properties propelled us to another strong quarter, despite a more challenging economic environment," said Google CEO Eric Schmidt in a statement.

Net income for the second quarter of 2008 was $1.25 billion, down from $1.31 billion in the first quarter of 2008.

Non-GAAP EPS, or profit per share, in the second quarter of 2008 was $4.63. It was $4.84 in the first quarter of 2008.

According to Bloomberg, analysts on average expected profit of $4.73.

During a conference call for investors, Schmidt maintained that Google was well-positioned to ride out the difficult economic times. He suggested that the downturn would encourage a "flight to quality and measurability." Various Google executives attributed the decline in AdSense revenue and paid clicks to typical seasonal fluctuations and continuing efforts to promote ad quality -- rejecting more clicks as fraudulent or invalid and placing fewer ads.

Despite Google's inability to maintain its rate of revenue growth -- the closer Google gets to 100% search market share, the less growth is possible -- it's still doing pretty well. "Google took more than its fair share of the overall increase in search spending: For every new dollar spent on search in Q2 2008 versus Q2 2007, $1.10 went to Google," said Lee-Ann Prescott, director of research and communication for research firm Efficient Frontier, in a blog post. "Yahoo lost $0.09, and Microsoft lost $0.01. In other words, advertisers are putting all of their new search dollars into Google, and pulling money out of Yahoo Search and Microsoft Live Search."

Nonetheless, Prescott said that Microsoft Live Search and Yahoo Search still offer a good return on investment compared with Google, which makes them essential marketplaces for advertisers faced with tight revenue goals.

Google co-founder Sergey Brin reassured investors with talk of Google's ongoing search improvements and the promise of the mobile advertising market. "We've substantially increased the size of our index. ... Now our users get much fresher and faster results across a greater range of sources," he said.

Brin said Google had launched over 100 search quality improvements during the quarter. And he said that over half a million businesses are using Google Apps, the company's online productivity programs.

While mobile phones may have small screens, Brin believes that ads on the devices can be better targeted through the use of location data. And he has high hopes for the iPhone and other smart phones, like the gPhone as drivers of mobile ad revenue. Devices like the iPhone that make search easier generate 30 times as many searches as conventional mobile devices, he said.

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