Google back on track for growth, eyes deals

An employee answers phone calls at the switchboard of the Google office in Zurich, August 18, 2009.

SAN FRANCISCO (Reuters) - Google Inc's (GOOG.O) growth machine is back in gear.

The world's No. 1 search engine not only posted higher-than-expected third-quarter profits and revenues, but also said it was looking for major acquisitions and could buy a large company "maybe every year or two."

"We're open for business in making strategic acquisitions, both large and small," Google CEO Eric Schmidt told analysts on a conference call.

Google executives said large advertisers were more eager to spend on search ads in the third quarter and consumers shopped more online, helping the Internet company notch its strongest quarter-on-quarter revenue growth since 2007's final quarter, underscoring improving economic conditions.

Shares of Google, which have surged more than 80 percent since mid-March, rose 3.2 percent to $547.00 following the earnings report, after closing down 1 percent at $529.91 on Nasdaq on Thursday.

"It's a reflection of the fact that there's a lot more economic activity going on the Internet," said Sanford Bernstein analyst Jeff Lindsay.

Google was widely expected to be one of the biggest, early beneficiaries of an economic recovery, thanks to its dominance of the online search market, whose growth has slowed as recession-hit companies cut back on advertising spending.

It said both the amount of money that advertisers pay for the text ads that appear alongside search results as well as the number of clicks on those ads by Web surfers increased quarter-over-quarter.

Google also made headway in some of its other business initiatives, although they have yet to pay off the way its search advertising business has.

Finance Chief Patrick Pichette said the company was monetizing more than 1 billion video views a week on YouTube, the popular video site that Google bought for $1.65 billion in 2006. He reiterated comments made last quarter that YouTube was on track to become profitable in the "not too distant future."

And executives said searches on mobile devices, like smartphones, increased 30 percent quarter over quarter, though they declined to offer details about how mobile ad rates compared with rates for ads in the standard search engine.

EYE ON COSTS

Google's results come as Microsoft (MSFT.O) steps up efforts to challenge Google's search dominance with a revamped search engine, dubbed Bing, and a recently announced search deal with Yahoo that has yet to close.

But Brigantine Advisors analyst Colin Gillis said Google's third-quarter results showed that Google -- whose share of the U.S. search market is about 65 percent, according to comScore -- was not under any immediate threat. Yahoo is a distant second with an 18.8 percent market share.

"Google has no competition. Yahoo (YHOO.O) is withering on the vine and Bing is too tiny now," said Colin Gillis, senior analyst at Brigantine Advisors.

Google's net revenue in the third quarter -- excluding traffic acquisition costs, or the money that Google shares with partners -- rose 8.5 percent from a year earlier to $4.38 billion, beating the $4.24 billion expected by analysts.

Net revenue also grew quarter-on-quarter for the first time this year, after being roughly flat in the second quarter and falling for the first time ever in the first quarter.

Net income was $1.64 billion, or $5.13 a share, compared with $1.29 billion, or $4.06 per share, a year earlier, thanks in part to ongoing cost controls at the Mountain View, California company.

Excluding special items, profit per share was $5.89, beating the $5.42 expected by analysts, according to Thomson Reuters I/B/E/S.

But some analysts sounded a note of caution about Google's spending going forward.

"The only thing making investors cautious is that Schmidt mentioned investing heavily on our future," said RBC Capital Markets analyst Ross Sandler.

Schmidt had told Reuters in September that Google expects to buy one small company a month as it starts up its dealmaking machine again after a breather during the worst period of the financial crisis.

He said on Thursday that any large deals would need to have a significant strategic rationale, such as accelerating revenue or providing access to a "major, major" pool of customers that Google cannot currently reach.

Besides acquisitions, Google plans to step up hiring of engineers and salespeople as well as invest in new projects as its business improves and worries about the economy recede.

"We are short key technology talent to achieve some of these broader initiatives," Schmidt said.

(Writing by Tiffany Wu; Editing by Edwin Chan, Richard Chang, Gary Hill)