Brisk Ad Sales Spur Google in Third Quarter

Brisk Ad Sales Spur Google in Third Quarter
By MIGUEL HELFT
Copyright by Reuters
Published: October 15, 2009
http://www.nytimes.com/2009/10/16/technology/companies/16google.html?th&emc=th


SAN FRANCISCO — Consumers are loosening the grip on their wallets and advertisers are trying to get their attention — at least on the Internet.

That was the upshot of Google’s stronger-than-expected third-quarter results on Thursday. In the latest sign that the global economy may be on the mend, Google said that its net income rose 27 percent in the third quarter as brisker advertising sales lifted revenue 7 percent.

In a conference call with analysts, Eric E. Schmidt, Google’s chief executive, declared that the worst of the recession was over and that the company was ready to begin a new phase of investment, hiring and acquisitions.

Mr. Schmidt said that while some uncertainty remained about the pace of the recovery, Google is “very optimistic about the future. We now have the business confidence to invest heavily in the next phase of innovation.”

Google typically does not give guidance to financial analysts, and Mr. Schmidt declined to discuss Google’s investment plan in detail. But in an interview he said that the company would most likely hire “some number of thousands of people over the next year” with the bulk of the increases in engineering and sales. Google managed to weather the recession by cutting costs aggressively and slowing its once-torrid pace of hiring to a trickle.

Some advertising industry executives said that Google’s relatively strong results came as no surprise, as advertisers have showed renewed signs of optimism in recent weeks.

“Now that marketers have seen the bottom, they are taking dollars off of the sidelines and plowing them into search advertising first and foremost,” said Bryan Wiener, the chief executive of 360i, a digital marketing agency. “We are seeing double-digit increases in budgets for 2010 from our clients.”

Analysts said that Google’s results, which are closely correlated with online spending, are likely to be celebrated across a broad swath of the industry.

“This should be bullish for everyone,” said Benjamin Schachter, a securities analyst with Broadpoint AmTech.

Google reported net income of $1.64 billion, or $5.13 a share, compared with $1.29 billion, or $4.06 in the period a year earlier. Revenue was $5.94 billion, up from $5.54 billion last year.

Net revenue, which excludes commissions paid to advertising partners, was $4.38 billion, up 8 percent, from $4.04 billion. Adjusted income, excluding the cost of stock options and other items, was $5.89, up from $4.92 a year earlier.

The results handily beat forecasts and shares of Google climbed 3 percent in after-hours trading to $546.25, a level not reached since July 2008. (In the last month, Google shares have climbed nearly 12 percent, outstripping gains of about 4 percent for the Standard & Poor’s 500-stock index and the Nasdaq.)

On average, Wall Street analysts expected Google to report adjusted income of $5.40 a share on net revenue of $4.23 billion.

“The stock would be up more, except that they said they would start to invest heavily again,” said Mr. Schachter, adding that the renewed investment could put pressure on profit margins.

To be sure, while Google’s revenue growth was strong when compared with the first half of the year, it was only a fraction of what it was in prior years. Google grew at 31 percent in 2008 and 56 percent in 2007. It hit the slowest growth rate in its 11-year-history, 3 percent, in the second quarter.

Google’s performance is closely watched in part because the company accounts for roughly a third of all online ad spending in the United States. In addition, Google’s fortunes are more closely aligned with consumer spending than those of rivals like Yahoo or AOL or Microsoft.

Unlike those companies, which receive a sizable portion of their advertising revenue from display ads, Google relies almost exclusively on text ads, which marketers use to lure consumers to their Web sites. Clicks on Google’s ads typically suggest that consumers are inclined to shop.

Some analysts said that a company whose business depends more on display ads might not see the same kind of turnaround as Google. And they said that Google’s own forays into display advertising remain a work in progress. Google executives described those efforts in upbeat terms, but they gave few specifics.

“They are looking very well poised for the rebound on the search side,” said Youssef Squali, an analyst with Jefferies & Company. “On the display, the jury is still out.”