Google defies economy to beat forecasts; shares rise

SAN FRANCISCO Fri Oct 17, 2008 12:35am EDT

A Google sign is seen at its headquarters in Mountain View, California May 22, 2008. REUTERS/Robert Galbraith

A Google sign is seen at its headquarters in Mountain View, California May 22, 2008.

Credit: Reuters/Robert Galbraith

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SAN FRANCISCO (Reuters) - Google Inc profits surpassed Wall Street quarterly forecasts, sending its shares up more than 10 percent as the Internet search and advertising leader held deepening economic gloom at bay.

Web traffic and revenue growth were strong in all major parts of the world and searches were up for almost every industry using Google, Chief Executive Eric Schmidt said.

But with uncertainty widespread among global business leaders, government officials and media commentators over where the economy is headed, Google is unsure what impact this could have on its advertising dependent business, the CEO said.

"We are all in uncharted territory," Schmidt said of the economy, adding that Google has taken expense control more seriously recently. "We are very realistic about the macro environment, but we are optimistic about Google's future."

Wall Street analysts were pleased by efforts to rein in expenses. Many have complained for years at how Google was "spending like drunken sailors" to hire new employees and install computer data center capacity as its growth exploded.

Google added just over 500 employees in the quarter, about half of them engineers, taking total staff to about 20,000, and the company said it would continue to hire, but cautiously.

Relieved investors said Google appeared to be alone in its ability to weather the economic storm.

"Even in a down market, advertisers are going to be seeking customers. These results separate out Google from the eBays and the Yahoos," said Colin Gillis, an analyst at Canaccord Adams. Ahead of the report, he had prayed aloud that Google results might shore up investor confidence.

Net income for the third quarter rose to $1.35 billion, or $4.24 a diluted share, from $1.07 billion, or $3.38 per share.

Excluding employee stock compensation costs and one-time items, profit rose to $4.92 per diluted share and topped Wall Street's target of $4.75, according to Reuters Estimates.

Revenue, including commissions paid to affiliated advertising sites, totaled $5.54 billion, up 31 percent from the year-earlier quarter but up only 3 percent from the second quarter of this year.

The results were powered by international sales, which rose 41 percent. This came despite the fact that Britain, Google's second largest market, "showed some softness" with 17 percent growth from a year ago but flat compared with the June quarter, Google officials said.

Revenue fell squarely in the middle of forecasts calling for an increase of 26 percent to 37 percent, signaling the company's decelerating growth. Revenue had risen 57 percent in the 2007 third quarter over the same 2006 period.

"'Good enough' given the current climate," Goldman Sach analyst James Mitchell said in a note to investors.

The company dramatically cut back on purchases of property and equipment to $452 million for the quarter ended in September from $697 million in the June quarter.

Google continues to generate cash at one of the fastest rates in the Internet industry. It had $1.73 billion in free cash flow in the third quarter, up 60 percent both from the year-earlier quarter and the quarter ended in June.

Google's stock had fallen by more than half this year as investors have anticipated that the company's pay-per-click advertising format would be caught in the year-long slump in the wider advertising market. Google's decline compares with the 38 percent drop so far this year in the Standard & Poor's 500 Index.

Google shares hit an all-time high of $747 just under a year ago as investors calculated the potential of the company's moves into new advertising formats such as mobile phones, radio, TV and display ads preferred by corporate marketers.

Paid clicks -- a measure of how often Google gets paid for advertisements it runs alongside Web search results -- rose 18 percent from the year-ago quarter and 4 percent from the second quarter ended in June, reversing a decline earlier this year.

"The number of ads Google was showing was down. In the third quarter, that seemed to stabilize. If you could point to one underlying metric, that would be it. The ad coverage stabilized after dropping off this year," said Clayton Moran, an analyst at Stanford Financial Group.

Separately, in a good sign for battered technology investors, microchip maker Advanced Micro Devices Inc posted quarterly results that were better than expected, sending its shares up 13 percent to $4.66 in after-hours trading.

IBM, which released positive preliminary results a week ago in order to shore up flagging market confidence, reported on Tuesday that its services and software units offset declines in its hardware business.

Shares of Google rose 10.5 percent to $390.30 in after-hours trade following the report, extending a 4.1 percent gain on Nasdaq, where it closed at $353.02 after a seesaw trading day.

"While it (Google) won't be immune from the economic downturn, the valuation is very competitive, and at the same time, Yahoo, its biggest competitor, is struggling. So from a competitive stance, they're great," said Greg Woodard, portfolio strategist at Manning & Napier Advisors.

Many on Wall Street had braced for Google to miss published analyst targets, he said.

(Reporting by Eric Auchard, Gabriel Madway, Alexandria Sage in San Francisco and Yinka Adegoke in New York; Editing by Phil Berlowitz, Richard Chang)

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