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Google Profit Tops Estimates on Ad Sales; Shares Rise (Update3)
By Crayton Harrison
Oct. 16 (Bloomberg) -- Google Inc., owner of the most popular Internet search engine, said third-quarter profit climbed 26 percent as more customers used Web search ads to spur sales in a slowing economy, sending the shares higher.
Net income rose to $1.35 billion, or $4.24 a share, from $1.07 billion, or $3.38, a year earlier, the company said today in a statement. Leaving out costs such as stock-based compensation, profit was $4.92 a share, beating the $4.75 average estimate of analysts in a Bloomberg survey.
Advertisers are shifting budgets away from TV and print media toward ads that run alongside search listings, targeting online shoppers. The Internet will account for 8.7 percent of the $284 billion in U.S. ad spending this year, up from 7.2 percent in 2007, according to Barclays Capital.
``This was exactly the kind of shot in the arm that investors need,'' said Jeff Lindsay, an analyst with Sanford C. Bernstein & Co. in New York. ``People lost a lot of faith in the Internet, but this is exactly what the doctor ordered.''
Excluding revenue passed on to partner sites, sales expanded to $4.04 billion, compared with the $4.05 billion average estimate. Total revenue climbed 31 percent to $5.54 billion.
Google, based in Mountain View, California, rose $36.98, or 10 percent, to $390 in extended trading after closing at $353.02 on the Nasdaq Stock Market. The shares have dropped 49 percent this year.
Low Expectations
At least eight analysts had reduced their estimates for Google's third quarter this month after the global credit crisis erupted. That made it easier for the company to beat their average estimates today.
``We are realistic about the poor state of the global economy, but it's Google, so we'll manage accordingly,'' Chief Financial Officer Patrick Pichette said today in an interview. ``We had a good third quarter, with strong traffic and revenue growth.''
In the U.S., Google fielded 63 percent of online searches in August, double the market share of Yahoo! Inc. and Microsoft Corp. combined. That dominance has helped Google command higher prices for ads, according to Yahoo, which is awaiting government approval of an agreement to let Google sell some ads on its sites.
`Uncharted Territory'
``The economic situation is so fluid that we're all sort of in uncharted territory,'' Chief Executive Officer Eric Schmidt said on a conference call. ``We've always been in this for the long term, and we believe that's even more important today than ever.''
The slumping U.S. economy had been expected to drag down results, said Clay Moran, an analyst at Stanford Group Co. in Boca Raton, Florida. ``Google is a resilient business that's going to fare relatively well in this recession, but it's not immune from the overall macroeconomic environment,'' he said.
Google, which doesn't forecast results, is seeing a slowdown in spending from some types of customers, such as U.S. auto and home-financing companies, Pichette said.
The company has cut back by slowing its hiring rate and spending less on travel and events, said co-founder Sergey Brin.
``We don't know exactly what the future holds. We've taken a conservative approach,'' Brin said in an interview. ``We view this as an opportunity to refine our company and sharpen it.''
Cutting Costs
Capital expenditures fell to $452 million, down 18 percent from a year earlier, as Google made more efficient use of its computing centers, Brin said. He said he couldn't forecast whether the costs would continue to fall.
Google recorded $280 million in costs for stock-based pay, up from $273 million the previous quarter. Those costs will reach $1.1 billion in 2008, leaving out stock awards granted after Oct. 1, Google said.
Sales outside the U.S. made up 51 percent of Google's revenue, up from 48 percent a year earlier. If foreign exchange rates for currency had remained constant over that period, Google's third-quarter sales this year would have been $168 million lower, the company said.
The credit crisis may cost the Internet ad market $6.7 billion in lost sales through 2010, according to Collins Stewart Plc. Big and small businesses, from General Motors Corp. to Simplexity LLC, are reducing ad spending plans, while some financial companies, such as Wachovia Corp., have disappeared.
The reductions will push down growth in U.S. Internet ad outlays to less than 20 percent next year for the first time since 2002, said Sandeep Aggarwal, a Collins Stewart analyst in San Francisco.
Google, which gets almost all its revenue from search ads, is developing ways to advertise with images and video. The company struck a deal this month to show full-length programs from CBS Corp. on its YouTube site, splitting ad revenue with the network.
Microsoft, seeking to close the gap with Google, bid as much as $47.5 billion for Yahoo this year. Sunnyvale, California-based Yahoo rejected Microsoft's offer in May, opting instead to strike the advertising partnership with Google.
To contact the reporter on this story: Crayton Harrison in Dallas at tharrison5@bloomberg.net
Last Updated: October 16, 2008 19:13 EDT
