Like two straight-A students who uncharacteristically fail an exam, technology titans Google and Microsoft issued quarterly results on Thursday that disappointed investors.
Microsoft, which is engaged in a bruising takeover battle with Yahoo, topped US$60 billion in revenue for its complete fiscal year for the first time. But it missed Wall Street’s profit expectations amid rising expenses and an uncertain advertising climate.
The mixed results drove the company’s stock down more than 6 percent in after-hours trading.
Microsoft’s nemesis, Google, fared little better. It also posted strong quarterly growth, reporting US$3.87 billion in revenue, excluding the commissions it pays to advertising partners, which was in line with forecasts.
But Google also reported expenses that were higher than expected, along with lower-than-anticipated income from the interest on its pile of cash, causing the company to miss Wall Street’s expectation for earnings per share.
Google investors, who have been looking for signs that the company is susceptible to the recessionary winds that are blowing through other parts of the Internet, punished the stock after hours. It was trading around US$493 a share, a decline of more than 7 percent.
Under more sanguine circumstances, the two reports of largely healthy earnings from Microsoft and Google may have soothed investors. But with what seems like a daily dose of bad economic news, Wall Street has been quick to react negatively when Internet companies show signs of weakness.
EBay posted disappointing results this week, and on Thursday, ValueClick and Looksmart, two companies in the display advertising business, said their profits were being hurt by the economy. The news sent their shares tumbling.
Google executives argued that they were more protected than rivals against choppy economic waters.
“We don’t believe we are inoculated from global economics, but we do believe if there is a worsening, we do better than anyone else in the ad industry,” Google chief executive Eric Schmidt said in an interview.
He pointed to Google’s ability to customize ads and give advertisers precise data about the success of their spending.
“If you are an advertiser, you know exactly what you get from your dollar,” he said.
Investors scrutinizing Google’s earnings report, however, were probably eager to look between the lines.
Analysts noted that Schmidt had made reference, for the first time, to the “more challenging economic environment” in his prominent statement on Google’s earnings release. They also observed that Google had taken the unusual step of having Hal Varian, its chief economist, on the earnings call with investors and analysts.
Scott Kessler, an analyst at Standard & Poor’s, said that unlike most companies Google does not offer guidance about its future results.
“So people are always trying to interpret what the company is intentionally or unintentionally trying to tell them,” Kessler said.
During the call, Varian said that the number of searches in certain categories like finance, real estate and luxury goods was declining. But he also said that the price of ads in those areas was increasing, as advertisers competed in auctions to get their ads in front of customers.
“During a period of slow economic growth, the last thing an advertiser wants to cut is spending on search-based advertising,” Varian said.
Investors were focused on other signs of weakness in Google’s business, like a slowdown in Britain. The company blamed Europe’s typically weak second quarter for the shortfall.
For Microsoft’s part, the news was also largely, but not completely, positive. Profit rose for the quarter based on strong PC sales in developing markets and rising demand from corporate customers. The company reported a net profit of US$4.3 billion, or US$0.46 a share, in its fiscal fourth quarter ended June 30, versus a profit of US$3.04 billion, or US$0.31, in the same period a year ago. Revenue rose 18 percent to US$15.84 billion. Analysts said that while the company’s business was sound, it appeared to have lost control of expenses during the quarter.
The amount Microsoft spends on research and development, along with sales and marketing, “was significantly higher than people expected,” said Brendan Barnicle, a financial analyst at Pacific Crest Securities in Portland, Oregon.
Unlike Google, Microsoft said that the company’s most significant area of weakness was in its ad business.
“Where we saw softness in the market was in advertising,” said Colleen Healy, Microsoft’s general manager for investor relations, attributing the weakness to budget tightening and to pricing pressure from competition.
In general, economists say the technology sector of the economy is somewhat insulated from a steep domestic downturn because it is increasingly global. At Microsoft, 85 percent of revenue now comes from outside the US; at Google, that figure is 52 percent.
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