Bloomberg News

Google Earnings Beat Estimates on Search Advertising Growth

October 13, 2011

(Updates with comment by CEO in eighth paragraph.)

Oct. 13 (Bloomberg) -- Google Inc., owner of the world’s most popular search engine, reported sales and profit that beat estimates as businesses spent more to reach online consumers through advertisements. The shares climbed in late trading.

Third-quarter sales, excluding revenue passed on to partner sites, rose to $7.51 billion, Mountain View, California-based Google said on its website. That topped the $7.23 billion average of analysts’ estimates compiled by Bloomberg. Profit, excluding some items, was $9.72 a share, beating the $8.76 average estimate.

Google is benefiting as companies, concerned about economic weakness, use Web-search and display ads as a low-cost way to reach customers on computers and smartphones. Search advertising should reach $37.7 billion this year globally, up 23 percent, while total Internet ad spending should climb 20 percent, according to media researcher MagnaGlobal.

“The search business is relatively resistant to the slowing economy,” said Clay Moran, an analyst at Benchmark Co. “The search business will do relatively well and has done relatively well. The other reason is they are gaining share in display and mobile.”

Google’s shares climbed as much as 7 percent to $598.43 in late trading. Earlier, they rose 1.9 percent to close at $558.99 in New York. They have dropped 5.9 percent this year.

Third-quarter net income climbed 26 percent to $2.73 billion, or $8.33 a share, from $2.17 billion, or $6.72, a year earlier.

Ad Clicks

Results are bolstered not only by overall industry growth, but also by rising profitability of Google’s existing business. The number of clicks on ads rose about 28 percent in the third quarter, while the average cost per click increased approximately 5 percent.

Chief Executive Officer Larry Page is trying to fend off rivalry from Facebook Inc., the biggest social network, with a social media effort called Google+. The service has more than 40 million users, up from more than 10 million in July.

The company aims to offset increased spending by becoming more efficient, shuttering more than 20 businesses, Page said.

“Ever since taking over as CEO, I have focused much of my energy on increasing Google’s velocity and execution, and we’re beginning to see results,” Page, who took over as CEO earlier this year, said during a call with analysts.

Hiring Pace

Page kept the pace of hiring little changed. Google added 2,585 employees to finish the quarter at 31,353, a 9 percent increase from the previous quarter. Staffing increased 9.3 percent in the second quarter.

Even with more competition from Microsoft Corp., Google picked up market share in the U.S., according to Sunnyvale, California-based Efficient Frontier Inc., which helps companies promote products online. Google had 82 percent of spending on search advertising in the third quarter, up from 81 percent in the two previous quarters.

Microsoft, which provides search and ad services for Yahoo! Inc.’s U.S. websites under a 10-year agreement, had 18 percent of spending, down from 19 percent in the previous two quarters, according to Efficient Frontier.

Widening Search Share

Google also has made gains in the share of searches made by online surfers. The company increased its U.S. market share to 65.3 percent in September from 64.8 percent in August, according to ComScore Inc. Yahoo remained No. 2, even as its market share fell to 15.5 percent from 16.3 percent. Microsoft, which had 11.2 percent in the year-ago period, was unchanged at 14.7 percent.

“Search is good,” said Kerry Rice, an analyst at Needham & Co. in San Francisco, who rates the stock a buy and doesn’t own shares. “Paid search is still the biggest component of online advertising, and Google’s obviously going to win the vast majority of that dollar.”

While traditional searches may be growing, Google is pushing into new areas, including mobile. Google’s Android software has emerged as the biggest smartphone operating system, bolstered by HTC Corp., Samsung Electronics Co. and Motorola Mobility Holdings Inc. adopting the software.

Mobile Ad Gains

Revenue from mobile advertising is on pace to reach $2.5 billion on an annual basis, Page said on the call.

With the growth, Google and device makers have faced legal challenges from companies including Oracle Corp. To bolster its patent lineup, Google said in August it planned to purchase Motorola Mobility for $12.5 billion, its largest acquisition ever. Motorola Mobility brings more than 17,000 patents.

More than 190 million devices Android have been activated around the globe, Page said. Android continues to grow and expand even as it comes under legal scrutiny, he said.

“We’re very excited about Android and we see our partners and the whole ecosystem continuing to grow hugely,” Page said. “And while there’s been lots of people trying to attack that and so on, we see absolutely no signs that that’s effective.”

-- Editors: Lisa Rapaport, Nick Turner

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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