By MYLENE MANGALINDAN, Wall Street Journal
July 20, 2006 6:45 p.m.

Google Inc.’s second-quarter profit doubled and revenue soared 77%, an indication that the Web search company is gaining market share and controlling its costs as more advertisers shift their spending to the Internet from traditional media.

The results, which sent Google shares up more than 1% in after-hours trading, contrast with that of rival Yahoo Inc. earlier this week. On Tuesday, Yahoo said it would delay some improvements to its search-advertising system, an announcement that sent Yahoo’s shares down 22% on Wednesday.

For months, Google has been walking a fine line trying to meet outsized Wall Street’s earnings expectations while ramping up spending to accommodate its ambitious global and technology expansion plans. Wall Street and Silicon Valley companies have been looking for a turning point at which the company will show signs of slowing revenue and profit growth, but that point doesn’t yet appear to have come.

In the latest quarter, analyst Safa Rashtchy of Piper Jaffray & Co. said Google not only was able to control its expenses, but it appears to be gaining market share against rivals such as Yahoo and Microsoft Corp. “This is one of the best outcomes we could have for Google” in what is considered a slow quarter, he said.

Google’s expenses, particularly capital expenditures, have been rising as the company invests in computers, networking equipment and facilities to maintain its competitive and technological edge. Google’s expenses rose 81% to $1.64 billion in the quarter from a year ago, in line with analysts’ expectations and previous quarters. Meanwhile, the company’s total costs in the first quarter rose 86% from a year ago, and last year’s fourth-quarter costs rose 85% from a year earlier.

Capital expenditures in the second quarter were $699 million, including $319 million related to real-estate purchases. The company said it expects its growth rate for capital expenditures this year will be “substantially greater” than its revenue growth rate for 2006.

Net income was $721.1 million, or $2.33 a share, compared with $342.8 million, or $1.19 a share, a year ago. Excluding certain stock-based compensation and other factors, Google earned $2.49 a share compared to analysts’ forecast of $2.22, according to Thomson First Call.

Revenue rose to $2.46 billion from $1.38 billion. Excluding commissions paid to marketing partners, revenue was $1.67 billion, above analysts’ expectations of $1.645 billion.

Google reported results after the close of the market. At 4 p.m. in Nasdaq composite trading, the stock was at $387.12, down $11.88. Shares rose to $390.14 in after hours trading.

Google continues to outpace Yahoo and Microsoft Corp. in the search-technology market world-wide. In the U.S., Google’s share of Web search rose to about 48% in the second quarter through May. That compared to Yahoo’s 31% share and Microsoft’s 14%, which were flat and down respectively from the first quarter, according to investment research firm Majestic Research Corp.

Google co-founder Sergey Brin attributed the U.S. market share gain to improvements in the relevance of the company’s search service and its ease of use.

Many analysts consider Google’s search-advertising system to be superior to rivals because it delivers more relevant advertising results, allowing Google to generate more revenue from those ads. Both Yahoo and Microsoft are investing heavily to develop search-advertising systems to compete with Google’s, but have struggled to match Google’s technology, say some analysts.

In a conference call, Google Chief Executive Eric Schmidt said partnerships remain important as a way to increase Google’s reach and distribution into different markets and areas. Company executives said Google’s partnership with Time Warner Inc.’s America Online unit, for instance, is on track. Under that deal, which was signed last December, Google agreed to invest in AOL and AOL agreed to use Google’s search technology, with both sharing revenue from search advertising.

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