After nearly a year of revenue slowdowns and cost-cutting, Google is gearing up to take advantage of a recovering economy.
Adding to a series of positive earnings reports from technology companies, the Internet search giant said on Oct. 15 it sees recovery in its core business of online advertising. Google (GOOG) has begun stepping up hiring and capital spending, as well as considering more small and large acquisitions. "We now have the business confidence to invest in the next phase of innovation," Google Chief Executive Eric Schmidt said on a conference call with analysts.
Google handily beat third-quarter earnings expectations. It said revenue that excludes payments to advertising partners rose 7%, to $4.38 billion—significantly higher than the $4.24 billion expected by analysts surveyed by Thomson Reuters (TRI). "We were all looking for acceleration in revenue growth from Google, and they delivered," says Sandeep Aggarwal, an analyst with financial-services firm Collins Stewart.
Net income rose 27% to $1.64 billion, or $5.13 a share. The more closely watched profit excluding items such as stock option expenses was $5.89 a share, also beating the average forecast of $5.42 a share. A year ago, Google earned $4.92 a share on $4.04 billion in revenue.
The results are the latest in a series of signs the recession is easing. In particular, technology companies have started reporting better earnings and providing more positive outlooks than they did earlier this year. On Oct. 13, chipmaker Intel (INTC) said third-quarter sales rose a better-than-expected 17% amid an improvement in demand for its products. IBM (IBM) also topped earnings forecasts on Oct. 15, though investors were disappointed that the computer services provider reported a decline in orders, a gauge of future business.
In contrast, Google investors liked what they saw, lifting shares about 3% in extended trading. The stock had slumped 1% amid a decline in the broader market on Oct. 15, before Google's results came in. Google's shares already had risen 67% this year, to an Oct. 14 close of 535.32, the highest in at least 52 weeks. Just in the last month, the stock has risen 12%, compared with a 3% gain in the tech-heavy Nasdaq stock market. Several analysts have raised Google's 12-month target price to above 600.
A Revival for Online Ad Spending
Google's results may augur recovery in demand for online advertising, an industry where overall sales fell by more than 5% in the first six months of 2009. Search advertising has held up better than display ads, an area led by Internet portal Yahoo (YHOO), but search ads were still hit by the poor economy. Google's revenue growth had slowed to just 3% in the second quarter from a year ago, compared with 31% growth in all of 2008.
Now it appears marketers are starting to spend more on search ads, the snippets of text that appear next to and atop search results. Google said cost per click, the amount advertisers pay when people click on an ad, fell 6% from a year ago but rose 5% from the second quarter. Analysts took that as a positive sign.
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