Google’s profits steamed ahead in the second quarter. Here are the basics from the transcript of Google’s conference call:

Eric Schmidt (CEO)

Thanks very much, Kim. We’re very, very happy with having such a strong quarter in a seasonally-weak period for us. It looks like our model continues to work extremely well; our focus on innovation, the many things that we’ve talked about with you all in the past. So thank you very much for joining us. It’s another good day, a good quarter for Google.

When I look at why this is happening, I see the evolution of our strategy in front of us over and over again. We start with one thing, we learn, we iterate. That’s the hallmark of how Google operates.

Today we are going to talk a little bit about some of the new products which are coming at a fast and furious rate. I’d also like to emphasize the role of partnerships. In your questions and comments, let’s explore a little bit how the partnerships that we’re developing — not just the ad partnerships, which have been studied for many years, AOL and those sorts of things — but a lot of the new partnerships. You can see how we’re behaving with partnerships when you see the tremendously important Dell deal, Adobe deal, and others coming.

We’re learning how to operate, learning how to build a stronger ecosystem. The strength of that ecosystem is central to our strategy, because we can’t do it alone. We benefit by having the reach, impact, financials, and frankly, help from the partnerships, not just even the ones I named, but in content, in distribution and in access, all of which are announced with many, many more coming.

So with that, perhaps the best thing to do is to turn it right over to George to hear how did the quarter go, George?

George Reyes

Thanks, Eric. Q2 was another strong quarter in which we experienced robust revenue growth and made important investments, while continuing to grow our operating income.

Revenue was nearly $2.5 billion, representing growth of 77% over Q2 of last year and 9% over Q1. Google.com revenue was $1.4 billion, an increase of 94% over last year and 10% sequentially. Despite expected summer seasonality, growth in both traffic and monetization contributed to our performance this quarter.

Ongoing initiatives to improve the quality of our ads were a significant driver of increased monetization, along with continued healthy growth in our advertiser base.

AdSense revenue grew 58% over last year and 7% sequentially. Many of our AdSense research partners showed solid gains in monetization this quarter, while the continued expansion of our publisher base and increases in overall traffic drove growth in AdSense for content.

Revenue from the U.S. was $1.4 billion, or 58% of revenue. U.S. revenue increased 8% sequentially. International revenue was $1 billion, or 42% of revenue, and increased 11% sequentially.

Europe continues to drive most of our growth outside the United States, with the UK at 15% of revenue, or $370 million, up 8% sequentially. Germany continues to be our second strong market in Europe, but our investments in smaller markets are paying off. We saw double-digit growth in many countries, including Spain, Italy, Israel, Finland, Norway and Poland.

Outside of Europe, emerging markets in Asia and Latin America still represent a relatively small percentage of our total revenues, but continue to show strong revenue growth as we increase our hiring and investments in these regions. Traffic growth in Asia and Latin America was particularly strong this quarter. The World Cup did modestly impact traffic in certain countries, but did not have a material impact on revenues.

Foreign exchange impacted revenue positively this quarter, as revenue would have been $26 million lower in Q2 had foreign exchange rates remained constant from Q1 through Q2. Had foreign exchange rates remained constant from Q2 of ‘05 through Q2 of ‘06, international revenues this quarter would have been $18 million higher.

Turning to TAC, traffic acquisition costs were $785 million, or 32% of advertising revenue. The majority of TAC is related to payments to our AdSense partners. Toolbar distribution deals are typically accounted for as TAC if they are revenue-sharing in nature. In Q2, as in prior periods, TAC related to payments to distribution partners represented an immaterial percentage of advertising revenue.

Operating expenses included $107 million in stock-based compensation and totaled $652 million. These expenses included $342 million in headcount-related and facilities expense, as we ramped up hiring across our organization, particularly in sales and marketing and R&D; and $49 million in advertising and promotional expenses, including $24 million related to Toolbar distribution deals. We expect operating expenses to increase in the future due to continued aggressive hiring as well as marketing programs, including strategic distribution deals.

Non-GAAP operating profit, which excludes stock-based compensation, remains strong at $925 million, with non-GAAP operating margins of 38%, a sequential decline during this period of continued investment. As we have previously discussed, margins may decline as we continue to invest in the business.

In Q2, CapEx totaled $699 million. A substantial portion of CapEx was related to opportunistic real estate purchases of $319 million during Q2, about half of which was from existing lease conversions and half from investments to support future growth. The balance of CapEx was largely related to data center builds and infrastructure-related expenditures, including servers and network equipment, as well as data centers.

As we further improve and increase the sophistication of our core search and ads, we require customized infrastructure to deliver faster and better service to our users. The significant majority of our infrastructure spending supports our core search and ads platform, with the remainder supporting newer products and initiatives.

Our investments in core technology historically have paid off very handsomely for us in terms of our results. Rest assured that the decisions that we’re making around capital expenditures are carefully thought out and prudently debated. Note that a significant portion of our CapEx spending is related to build versus lease decisions around data centers; and buy versus lease decisions around real estate. By making these investments upfront, we expect to reduce our overall cost of operations over the long run.

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