Google trumps Wall Street targets

SAN FRANCISCO (Reuters) - Google Inc 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 net revenue in the third quarter, sending its shares 9 percent higher.

“This is the best performance they’ve had in three years. We’re back to the old Google we know and love,” said RBC Capital Markets analyst Ross Sandler.

“Clearly search is holding up better than anyone expected,” while efforts to branch into display and mobile advertising are on track to become significant parts of the business, he noted.

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. In July, Google’s second-quarter earnings fell short of Wall Street expectations, marking the first time in two years that the company had missed profit estimates.

But executives on Thursday offered investors what they said was a one-time glimpse of sales generated by its mobile and display advertising businesses. Those 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.

Kaufman Brothers analyst Mayuresh Masurekar said Google’s $1 billion run rate in mobile was higher than investors had expected, but he noted that the $2.5 billion run rate in display advertising was a gross number, meaning that some of that revenue is paid to Google’s partners.

Still, he said, the numbers should ease investor concerns about the company’s spending.

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“It shows that the investments that management is making, like the ones that they made in the past, ... are bearing fruit,” Masurekar said.

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.

Shares of Baidu Inc, the No. 1 search engine in China, rose 2.8 percent to $100.99 following Google’s results. Google has lost market share in China this year, following a spat with Beijing over censorship that resulted in Google relocating its search site to Hong Kong.


Google’s stock has underperformed the broader market in 2010, partly because the company’s growth prospects appeared to be slowing amid increasing competition from social networking powerhouse Facebook, which counts more than 500 million users.

On Wednesday, Facebook and Microsoft unveiled improvements to Microsoft’s Bing search engine that incorporate personalized Facebook data, such as restaurant recommendations from a person’s friends, into search results.

Google CEO Eric Schmidt, who participated in Thursday’s earnings conference call for the first time in several quarters, said the company was also working to make its search results more personal.

Google has been on an acquisition spree, buying more than 20 companies in 2010, including several companies that were developing social networking technology.

An employee answers phone calls at a Google switchboard in a file photo. REUTERS/Christian Hartmann

The company 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

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’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.

“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.

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