October 14, 2010 / 8:20 PM / 7 years ago

Google trumps Wall Street targets, shares soar

<p>Surfboards lean against a wall at the Google office in Santa Monica, October 11, 2010. REUTERS/Lucy Nicholson</p>

SAN FRANCISCO (Reuters) - Google Inc (GOOG.O) eased fears that big spending would erode margins as its results blew past Wall Street’s targets, and the Web search leader revealed for the first time the strength of its fledgling mobile and online display ad businesses.

Analysts said strong growth across Google’s core advertising business led to a 25-percent surge in overall revenue in the third quarter, sending its shares 9 percent higher.

Investors had feared that Google, seeking new sources of growth, was spending recklessly on initiatives such as its Android mobile software, acquisitions, renewable energy projects and even automated cars, with uncertain returns. At the same time, social networking giant Facebook poses a growing threat to Google’s main online ad business.

But executives offered investors what they said was a one-time glimpse of sales generated by its mobile and display advertising businesses on Thursday. Those ad operations generated annualized revenue run rates of more than $1 billion and $2.5 billion, respectively -- underscoring the outcome of investments into smartphones and online projects.

Google disclosed two revenue numbers to give Wall Street “confidence that where we’re investing in is really fueling great growth rates,” Chief Financial Officer Patrick Pichette told analysts on a conference call.

Analysts also pointed to a 16-percent jump in “paid clicks” on Google’s search advertisements, while earnings handily surpassed expectations despite hiring at a near-record pace and a one-third jump in operating costs.

“Looks like business is solid across the board. The biggest concern for investors was expenses. Given the EPS number, it looks like margins have to be better than what the Street was expecting,” said UBS analyst Brian Pitz.

RECORD HIRING

The world’s largest Internet search engine posted a third-quarter net income of $2.17 billion or $7.64 a share, excluding items, surpassing Wall Street’s average estimate of $6.69 a share, according to Thomson Reuters I/B/E/S.

Net revenue, which excludes fees that Google pays to partner websites, came to $5.48 billion, versus expectations for $5.27 billion. Net revenue in the 2009 third quarter was $4.38 billion.

Google said paid clicks on its search advertisements increased 16 percent year-over-year, and 4 percent from the second quarter.

It added more than 1,500 employees to its payroll in the third quarter -- which some analysts said was a record pace for the company -- and its operating expenses totaled $2.19 billion, up from $1.64 billion in the year-ago quarter.

CFO Pichette said the Internet industry was waging a “war for talent.” He added that its YouTube online video site was now “monetizing” over 2 billion views a week, a rise of 50 percent from a year earlier.

Google’s 9-percent rise in extended trading, to $590, would be the biggest single-day gain since November 2008. The stock had closed 0.44 percent lower at $540.93 on Nasdaq before the earnings announcement.

“Strong quarter, revenues are a nice beat, strength in the core search business as paid clicks is up 16 percent year-over-year,” said Benchmark Co analyst Clay Moran. “Bottom line big beat, but partially due to higher interest income and a lower tax rate.”

“The after-hours reaction may reflect excess pessimism heading into the quarter. But if not, it may be a bit of an aggressive reaction due to the fact that some of the beat was due to nonoperating items, and that the company materially ramped its capital spending during the quarter.”

Additional reporting by Alex Dobuzinskis and Liana Baker, writing by Edwin Chan; Editing by Richard Chang

Our Standards:The Thomson Reuters Trust Principles.
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