Google beats Street, revenue up 57%

Internet search and advertising giant reports strong increase in sales and profits that surpass estimates but stock is flat after hours.

By Paul R. La Monica, CNNMoney.com editor at large

NEW YORK (CNNMoney.com) -- Google, the world's leading Internet search company, reported strong growth in sales and profits that beat Wall Street's estimates, a further sign of Google's dominance in the lucrative online advertising market.

Shares of Google (Charts, Fortune 500) rose about 2 percent Friday morning, hitting a new all-time high in the process. But Google's stock has typically gained even more in the wake of strong earnings reports.

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Next stop, $700? Shares of Google have surged in the past year, passing both the $500 or $600 level in the process.
The rich get richer
Google's lead in search grew in September
Market share
Company Aug. '07 Sept. '07
Google 56.5% 57%
Yahoo 23.3% 23.7%
Microsoft (MSN) 11.3% 10.3%
IAC (Ask.com) 4.5% 4.7%
Time Warner (AOL) 4.5% 4.3%
Source:comScore

So the modest, as opposed to euphoric, reaction may be an indication that Wall Street was expecting the company to report even better third quarter results than it did. The stock, which has surged nearly 40 percent so far this year, rose about 1 percent in regular trading on the Nasdaq Thursday.

Google reported that revenues in the third quarter were $4.23 billion, up 57 percent from a year ago.

Excluding advertising sales that Google shares with partners, a figure known as traffic acquisition costs or TAC, the company reported revenue of $3.01 billion, ahead of the $2.94 billion that analysts were expecting on this basis according to Thomson Financial.

Brian Bolan, an analyst with Jackson Securities, noted that Google's traffic acquisition costs as a percentage of total sales decreased from the second quarter and from a year ago. That, he said, is a good sign since it shows that Google is keeping more of the advertising revenue from partnerships for itself.

Mountain View, Calif.-based Google posted net income of $1.07 billion, or $3.38 a share, an increase of 46 percent from a year ago. These figures do not include stock-compensation charges and tax benefits. Backing out those items, Google reported a profit of $3.91 a share, surpassing Wall Street's consensus forecast of $3.78 per share.

Even if Google didn't live up to the loftiest expectations on Wall Street - one analyst had an earnings estimate as high as $4.04 a share - Derek Brown of Cantor Fitzgerald said there was no denying that Google is the class of the Internet sector.

"It's another very strong quarter for the company. Growth is still extremely robust," Brown said, adding that it is even more impressive for Google to keep delivering such healthy growth since the company is no longer a small start-up.

But Google still has a start-up mentality in many ways. It continues to use its profits to invest heavily in both new employees and infrastructure. The company reported that it ended the third quarter with 15,916 employees worldwide, up 15 percent from the end of the second quarter. The company also said it spent $533 million on capital expenditures during the quarter.

Sandeep Aggarwal, an analyst with Oppenheimer & Co., said he was not concerned by Google's hiring spree.

"We think it's appropriate for Google to keep hiring. Internet advertising is still a new medium and a lot of time advertisers need hand holding. So you need more sales and marketing staff," he said.

Google's strong report comes two days after top rival Yahoo (Charts, Fortune 500) also posted third quarter results that topped analysts' expectations. But Google's revenue growth in the third quarter far exceeded that of Yahoo's. In addition, Yahoo's profits fell in the third quarter from a year ago.

During a conference call with analysts, Google chairman and chief executive officer Eric Schmidt said that Google experienced less of a dip in traffic during the third quarter than usual, an encouraging development since search volume tends to decline during the summer months in the Northern Hemisphere.

"We are pleased with such strong results in what is usually one of our seasonally weaker quarters," Schmidt said. He added that Google's investments internationally were paying off.

To that end, Google reported that revenues from outside the U.S. increased nearly 60 percent and accounted for 48 percent of the company's total sales. The weak dollar helped Google; the company said that international sales would have been $121 million lower if foreign currency exchange rates were the same as a year ago.

Chief financial officer George Reyes noted during the conference call that Google also benefited from healthy increases in traffic in the United Kingdom, the Netherlands, Brazil, China and South Korea.

Google is facing a bit of a tougher task in China though. Schmidt conceded that Google faces significant competition in China -- although he did not specifically mention industry leader Baidu by name -- but he said he thought the market was still relatively wide open.

But in the U.S., Google remains the king of search. And according to data from influential Web traffic research firm comScore released earlier Thursday, Google's market share lead over Yahoo and other search firms grew in September.

Google finished September with market share of 57 percent, according to comScore, up from 56.5 percent in August. Yahoo's market share also grew, but by a smaller amount, from 23.3 percent in August to 23.7 percent in September.

Microsoft's (Charts, Fortune 500) MSN, IAC's (Charts, Fortune 500) Ask.com and Time Warner's (Charts, Fortune 500) AOL all finished well behind Google and Yahoo in September, with 10.3 percent, 4.7 percent and 4.3 percent of the search market respectively. What's more, MSN and AOL lost market share in the quarter. (Time Warner also owns CNNMoney.com.)

"The credibility Google has with advertisers and customers is gaining. Their ads are not intrusive. They are an immersive part of the experience. Right now, Google has a pulse on the user and the advertiser," said Trip Chowdhry, an analyst with Global Equities Research.

Google has been taking many steps to expand beyond online search, however.

Along those lines, one analyst asked Google about the company's proposed deal to buy DoubleClick, a company that specializes in placing display ads, banners and other graphical ads, throughout a network of sites.

Google announced in April that it was planning to buy DoubleClick for $3.1 billion but the deal is still being reviewed by the Federal Trade Commission. Schmidt said he was confident that the merger would be approved.

Another analyst asked about Google's possible plans to invest in social networking companies. Google is rumored to be one of several companies looking at buying a stake in Facebook.

Schmidt would not comment specifically on Facebook speculation but he did say that the company was amenable to making strategic investments in companies if it made sense and that investors did not have to worry that Google's cash -- which totaled $13.1 billion at the end of the third quarter -- was "not burning a hole in our pockets."

Google also didn't specifically respond to a question by an analyst about whether the company was planning to launch a Google mobile phone, a product that many market observers believe Google is working on. The company will hold an analyst day on October 24 though and there is speculation that Google will have more details about its mobile plans then.

Separately Thursday, a group of media companies, including News Corp. (Charts, Fortune 500) and Viacom (Charts, Fortune 500), as well as online video sites Dailymotion and Veoh, announced proposed guidelines for posting copyrighted content on the Internet.

This could be considered a shot across the bow against Google and its YouTube subsidiary, which earlier this week unveiled technology to automatically filter and remove copyrighted content. Viacom filed a $1 billion copyright infringement suit against Google and YouTube in March.

Google executives did not discuss the new copyright guidelines during their prepared remarks or the question and answers session.

But Google co-founder Sergey Brin said the company was optimistic about Google's new overlay ads for YouTube, text that scrolls at a bottom of a video.

Brin added that he was excited about Google's automated service for selling television ads, a product that he said was gaining traction in the market. Google is testing a service with satellite television provider EchoStar to sell targeted ads using data from set-top boxes.

Analysts quoted in this story do not own shares of Google and their firms have no investment banking relationships with the company. Top of page

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