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Google Inc. has released its report for the 2nd quarter of 2008, which ended on June 30. The search engine giant reported 35% increase in income making the sum to $1.25 billion in the 2nd quarter. Google failed to keep up to the expectations of the analysts in this quarter. The earnings are $4.63/share which is $0.11 shorter than what was expected in a survey done by Thomson Reuters.

Just after the release of quarterly report, Google’s shares went down as low as $60/share, from $530/share to $470/share. Though the situation of shares didn’t get worse, it still is below $500. The company did very well in the first quarter but couldn’t keep up the pace in the second quarter.

According to Google’s CEO, Eric Schmidt:

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.

As we continue to focus on innovating in our core business of search, ads and apps, we also look forward to enhancing the experience of our users and expanding the reach of our advertisers and partners with new technologies and formats, particularly as our integration of DoubleClick gains momentum and creates new opportunities in display advertising and elsewhere.

Revenue of $5.37 billion were generated in the 2nd quarter which is 39% higher than the same quarter last year and 3% more than the 1st quarter of 2008.

Following are the highlights of the 2nd Quarter of 2008 as described by the Google Press Center:

Revenues:

Google reported revenues of $5.37 billion for the quarter ended June 30, 2008, representing a 39% increase over second quarter 2007 revenues of $3.87 billion and a 3% increase over first quarter 2008 revenues of $5.19 billion.  Google reports its revenues, consistent with GAAP, on a gross basis without deducting TAC.

Google Sites Revenues:

Google-owned sites generated revenues of $3.53 billion, or 66% of total revenues, in the second quarter of 2008.  This represents a 42% increase over second quarter 2007 revenues of $2.49 billion and a 4% increase over first quarter 2008 revenues of $3.40 billion.

Google Network Revenues:

Google’s partner sites generated revenues, through AdSense programs, of $1.66 billion, or 31% of total revenues, in the second quarter of 2008.  This represents a 22% increase over network revenues of $1.35 billion generated in the second quarter of 2007 and a 2% decrease over first quarter 2008 revenues of $1.69 billion.

International Revenues:

Revenues from outside of the United States totaled $2.80 billion, representing 52% of total revenues in the second quarter of 2008, compared to 48% in the second quarter of 2007 and 51% in the first quarter of 2008.  Had foreign exchange rates remained constant from the first quarter of 2008 through the second quarter of 2008, our revenues in the second quarter of 2008 would have been $88 million lower. Had foreign exchange rates remained constant from the second quarter of 2007 through the second quarter of 2008, our revenues in the second quarter of 2008 would have been $249 million lower.

$774 million revenues were generated from the UK which is 14% of the total revenue generated in the 2nd quarter which is 15% in the same quarter last year as well as 1st quarter of 2008.

Paid Clicks:

Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 19% over the second quarter of 2007 and decreased approximately 1% over the first quarter of 2008.

TAC – Traffic Acquisition Costs:

the portion of revenues shared with Google’s partners, decreased to $1.47 billion in the second quarter of 2008.  This compares to TAC of $1.49 billion in the first quarter of 2008.  TAC as a percentage of advertising revenues was 28% in the second quarter, compared to 29% in the first quarter of 2008.

Image source: GigaOm

Most of the TAC expense is regarding amounts which is eventually paid to AdSense partners. The amount was around $1.32 billion in this quarter. Furthermore TAC is also associated with the amounts which will  finally be paid to specific distribution partners and also to those who direct traffic to the Google. This amount is around $154 million in this quarter.

Other Cost of Revenues:

Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, credit card processing charges as well as content acquisition costs, increased to $674 million, or 13% of revenues, in the second quarter of 2008, compared to $624 million, or 12% of revenues, in the first quarter of 2008.

Operating Expenses:

Operating expenses, other than cost of revenues, were $1.64 billion in the second quarter of 2008, or 31% of revenues, compared to $1.53 billion in the first quarter of 2008, or 29% of revenues.  The operating expenses in the second quarter of 2008 included $810 million in payroll-related and facilities expenses, compared to $809 million in the first quarter of 2008.

Stock Based Compensation:

In the second quarter of 2008, the total charge related to SBC was $273 million as compared to $281 million in the first quarter of 2008.

According to the company, the estimated stock based compensation charges for grants to employees before 1st July, 2008 will be around $1.1 billion for the current year. Expenses related to employee stock awards, which are awarded after July 1, 2008 or non-employee stock awards which are awarded or will be awarded, are excluded. Also the company expects the intensity regarding all equity grants to employees to be exactly 2% or less.

Operating income:

GAAP operating income in the second quarter of 2008 was $1.58 billion, or 29% of revenues.  This compares to GAAP operating income of $1.55 billion, or 30% of revenues, in the first quarter of 2008.  Non-GAAP operating income in the second quarter of 2008 was $1.85 billion, or 34% of revenues.  This compares to non-GAAP operating income of $1.83 billion, or 35% of revenues, in the first quarter of 2008.

Interest Income & Other, (Net):

Interest income and other was $58 million in the second quarter of 2008, compared with $167 million in the first quarter of 2008.  The decrease was primarily related to lower yields on our cash balances, as well as lower average cash balances as a result of cash used in the first quarter to acquire DoubleClick; lower net realized gains on the sale of our marketable securities; and an increase in expenses as a result of more activity under our foreign exchange risk management program.

Total income:

GAAP net income for the second quarter of 2008 was $1.25 billion as compared to $1.31 billion in the first quarter of 2008.  Non-GAAP net income was $1.47 billion in the second quarter of 2008, compared to $1.54 billion in the first quarter of 2008.  GAAP EPS for the second quarter of 2008 was $3.92 on 318 million diluted shares outstanding, compared to $4.12 for the first quarter of 2008, on 317 million diluted shares outstanding.  Non-GAAP EPS for the second quarter of 2008 was $4.63, compared to $4.84 in the first quarter of 2008.

Income Tax:

Our effective tax rate was 24% for the second quarter of 2008.

Cash Flow & Capital Expenditures:

Net cash provided by operating activities for the second quarter of 2008 totaled $1.77 billion as compared to $1.78 billion for the first quarter of 2008.  In the second quarter of 2008, capital expenditures were $698 million, the majority of which was related to IT infrastructure investments, including data centers, servers, and networking equipment.  Free cash flow, an alternative non-GAAP measure of liquidity, is defined as net cash provided by operating activities less capital expenditures.  In the second quarter of 2008, free cash flow was $1.07 billion.

The company anticipates to carry on making significant capital expenses.

Cash:

As of June 30, 2008, cash, cash equivalents, and marketable securities were $12.7 billion.

As of June 30, 2008, Google contains 19,604 full-time employees worldwide  which is up from 19,156 employees of March 31, 2008.

You can download the Press Release here.