Bloomberg News

Google Sales Top Estimates on Robust Ad Demand

July 18, 2014

Google Inc. (GOOGL:US)’s sales exceeded estimates in the second quarter as the company sold more advertising alongside Web-search results.

Revenue, excluding sales passed on to partners, was $12.7 billion, the company said in a statement yesterday. That topped the average projection (GOOGL:US) of analysts for $12.3 billion, according to data compiled by Bloomberg.

Chief Executive Officer Larry Page is adding new features in mobile, video and Web services to boost user traffic and attract marketers as he seeks to bolster Google’s main ad business. As a result, the number of clicks on ads on YouTube, search and other Google sites increased 33 percent in the latest quarter, making up for a decline in ad prices. Since Google gets paid each time someone clicks on an advertised link, higher volumes result in more revenue.

“They’re the largest player, and they’re gaining share,” said Youssef Squali, an analyst at Cantor Fitzgerald, who rates the stock a buy. “It was a very good quarter.”

Google shares (GOOGL:US) rose 4.2 percent to $605.11 the close in New York.

Net income, including from Motorola, which is being sold to Lenovo Group Ltd., rose to $3.42 billion, or $4.99 a share during the second quarter, from $3.23 billion, or $4.77, a year earlier.

Arora Exits

Google also said Chief Business Officer Nikesh Arora is stepping down to become vice chairman of SoftBank Corp. and CEO of SoftBank Internet and Media. Omid Kordestani, who helped craft Google’s business model and was a senior adviser to the company, will take over Arora’s role, Google said.

Arora joined before the company’s initial public offering and was instrumental in building Google’s search-ad service into the largest online ad business in the world.

“He’s done a great job -- change happens, it could be healthy even,” Colin Gillis, an analyst at BGC Partners, said of Arora’s departure. “The positives are still positive.”

Second-quarter profit excluding certain items was $6.08 a share, compared with the average analyst estimate for $6.24.

While the biggest Web search company is getting less money for marketing spots, where the average price for an ad declined 6 percent, the expansion efforts helped push up the number of clicks on promotions. Ad prices are falling as smartphones encourage users to bypass Google’s search services and instead go directly to applications to find information. By 2016, Google’s share of the U.S. mobile-search market is projected to fall to 64 percent from 83 percent in 2012, according to EMarketer Inc.

Ad Market

The decline in ad prices from a year earlier was slower than the 9 percent drop in the first quarter. In the mobile-ad market, prices on smartphones were 57 percent lower than those on desktop computers during the second quarter, according to Covario Inc., a provider of services for advertisers to place digital-marketing messages on search engines and other websites.

In order to tap into new sources of revenue, Google introduced a service last year called enhanced campaigns, prompting marketers to funnel more of their spending to wireless devices. The company also has been pushing retailers to spend more on product listings that show off wares with pictures and pricing.

Google’s operating expenses, other than the cost of revenue, climbed 25 percent during the quarter to $5.58 billion. The company ramped up hiring during the quarter, adding more than 2,000 employees, pushing headcount to more than 52,000. Capital expenditures were $2.65 billion in the third quarter, up from $2.35 billion in the prior quarter.

Ad Performance

Within total ad sales, Google also laid out new metrics on how ads performed on and off its services. Google sites, including its search feature, saw average prices fall 7 percent. Google networks ads, including graphical advertisements posted on outside sites, saw prices decline 13 percent while clicks rose 9 percent.

In addition to investing in existing products, Google ramped up spending (GOOGL:US) on acquiring new companies and businesses. Earlier this year, Google spent about $3.2 billion on Nest Labs, a digital-thermostat maker. Last month the search company announced it would spend $555 million on in-home camera maker DropCam Inc. Google has also made several smaller purchases (GOOGL:US) this year, benefiting its advertising, cloud services and mobile businesses.

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

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Reed Stevenson, Jillian Ward


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