Google's UK revenues on rise but figures disappoint

Britain contributed 11% of turnover — which was down from 13% a year ago — but it was still the internet search giant's biggest operation outside the US.

Google's global revenues rose 23% to £4.4 billion, but analysts were disappointed that profits, up 24% to £1.2 billion, were not higher.

The firm missed Wall Street's quarterly profit forecasts for the first time in two years but vowed to drive long-term growth by investing in new businesses. Shares dropped to $474.50 after closing at $494.02 on Nasdaq.

There were concerns about rising costs as Google spent heavily on research and development and hired aggressively to expand into new products and markets in hopes of maintaining the growth momentum Wall Street looks for.

The firm eased worries that lingering economic uncertainty from the European debt crisis could take a toll on its business, and stressed that it planned to continue to invest aggressively.

"They're throwing more money into R&D than people were expecting and a little bit less into sales and marketing," said BGC Partners analyst Colin Gillis.

"Google has been pretty clear that it's going back into investment mode. They added 1,200 people in the quarter, which means more expenses are going to kick in in September."

Google said spending was concentrated on a handful of initiatives it believes could grow into billion-dollar businesses, providing diversification from the search advertising that now accounts for the lion's share of revenue.

Finance chief Patrick Pichette cited internet display advertising and the nascent smartphone ads market as key areas for investment and defended the spending amid the economic uncertainty.

"It's while everybody is cautious that you need to pounce," he said.

Pichette added that Google, which generated 52% of its second-quarter revenue outside the US, had not suffered any ill effects as investors fear that an economic slowdown could crimp ad spending.

Some analysts said headwinds from weakening foreign currency - in particular the euro - did not hurt revenue growth as much as anticipated. According to Google's statement, second-quarter revenue would have been $176 million if forex rates had remained constant from the first quarter.

"In our results and in our business we have seen no impact of the current turmoil of the economic environment," said Pichette.

The company has made major strategy shifts this year, including the decision to stop censoring search results in China - a move analysts say contributed to the 20%-plus decline in Google's stock this year.

Google is also increasingly pitting itself against rivals beyond Yahoo and Microsoft as it ventures into smartphone operating systems and mobile advertising.

Executives highlighted a three-fold jump in searches made on phones running Google's Android operating system as a sign of the platform's growing market traction.

To compete with the likes of smartphone giant Apple, Google has made acquisitions and added 1,184 employees to its payroll during the second quarter for a total of 21,805.

That spending spree contributed to a 22% year-on-year jump in operating expenses in the second quarter and took a toll on the bottom line, according to analysts.

"The question is going to be, how much money are they going to have to be putting in for new initiatives?" asked UBS analyst Brian Pitz.