When Yahoo's stock cratered after posting results that matched analyst estimates to the penny, I remarked that I wished for the same fate for Google.  If Google would just put up in-line results this quarter, and if the market would give them a 10% haircut, I'd be a buyer.  They got a haircut, but not as much as I'd hoped, and for reasons I don't quite understand.

First the facts:

1.) Analyst estimates for Yahoo pro forma earnings per share averaged $0.13.  Yahoo delivered exactly $0.13, and the stock tanked 11%.

2.) Analyst estimates for Google pro forma earnings per share averaged $1.21.  Google blew that away by delivering $1.36.  And the stock was still hammered 6% in after-hours trading.

There seems to be quite a lot of confusion about what what terms like "pro forma earnings per share" and "GAAP earnings per share" really mean.  The simple answer is that GAAP EPS is the number required by the auditors, while pro forma is the number that analysts prefer.  Analysts back out things like extraordinary items (like the gains Yahoo made by holding Google stock this quarter), and they reverse stock-based compensation ($47 million for Google this quarter).

But unlike Yahoo, Google doesn't publish a pro forma number.  And they make it really hard for analysts to quickly compute it.  So it's easy to falsely compare Google's GAAP results ($1.19 per share) with the pro forma estimate ($1.21 per share) and wind up with an invalid comparison -- you'd think Google missed their numbers.  If you really want to look at GAAP, the average analyst estimate was $1.09, and Google still trounced that estimate at $1.19.  Confused yet?  For more on this, see Marketwatch's write-up.

Another factor to consider is that Eric Schmidt, as he does every quarter, tried to get analysts to cool their jets a bit.  While (unlike Yahoo), Google does not provide guidance to analysts on sales or earnings, he did say that the third quarter this year will be difficult for Google.  Q2 and Q3 are seasonally weak for search anyway.  And with Google doing more business in Europe which has a much more pronounced summer drop-off than the U.S., and with a very strong Q3 last year, comparisons will be difficult this year.

But after listening to the call and running my own calcs on the Q2 numbers, all I can say is, "Wow!"  This was another incredible quarter.  By all accounts, Google's rate of growth should be starting to slow and its margins should be starting to shrink.  Last quarter I gushed about Google's dazzling results -- growth was accelerating, margins were expanding, and the business was printing money.  This quarter it's not only more of the same, but it looks to me like Google outdid Q1.  And Q2 is supposed to be seasonally depressed!

Here are the numbers I look at:

1.) Net revenue growth.  This isn't the gross revenue number that Google is forced to report by the accountants.  I first deduct traffic acquisition cost (TAC) from gross revenue.  (TAC is the amount Google pays partner sites for generating traffic to Google ads.)  Just like Ebay reports only their commissions as sales and not the gross value of the merchandise that their marketplace moves, I think the relevant revenue number for Google is the net amount they actually keep after passing through 80% of partner ad revenue to partner sites.

2.) Operating cash flow.  This represents the portion of each dollar of revenue that Google keeps after it pays salaries, utilities, rent, and other normal operating expenses.  I want to see this number growing faster than net revenue, and when expressed as a percentage of net revenue, I want to see that increase as well.

3.) Free cash flow.  This is operating cash flow less capital expenditures.  It's relatively easy for a capital-intensive business like Google (or airlines or cable companies) to throw off lots of cash from operations, but if they plow that and more back into more computers (or airplanes or cable plants), then the net result could be a wash.

So when I look at Google's second quarter using these measures, I'm very impressed.  First, Google is still growing at a blistering pace.  Net revenue is up 110% over last year, which is statistically equivalent to last quarter's 112% growth rate.  No hint of a slow-down here, and Google hasn't even started to monetize new services like Gmail, Local, Maps, Earth or Video.

And Google is achieving this growth not by discounting, but while actually increasing margins -- Google is keeping more of every dollar of ad revenue after they pay operating costs and invest in the business.  Operating cash flow as a percentage of net sales was 38.4% this time last year, then increased spectacularly to 66.6% last quarter, and increased again to 70.2% this quarter.  After investing $157 million in new data centers and offices this quarter (up 163% from last year), Google's free cash flow as a percentage of net sales was an astounding 52.1%, up from 48.7% last quarter, and up from 15.6% last year.

I'm sorry if I'm gushing here, but I've never seen a business perform this well, this consistently.  Google not only provides products with worldwide appeal, but has built a business that performs at levels far greater than its most successful peers.  Microsoft generates tremendous piles of cash each quarter, but they have nowhere near Google's growth rate or profit margins.  Yahoo can't touch 'em, Oracle can't touch 'em, Time Warner can't touch 'em.

So if Q2 was supposed to be a difficult quarter and Google still delivered these sparkling results, how will they do in Q4 when business really picks up?  What's not to like here?