Google Gains as Ad Demand Helps Sales

By Brian Womack - Oct 15, 2011 3:31 AM GMT+0700

Google Inc. (GOOG), the world’s biggest Internet-search company, rose in U.S. trading after demand for online advertising vaulted third-quarter sales past analysts’ estimates.

Excluding revenue passed on to partner sites, sales rose to $7.51 billion, Mountain View, California-based Google said yesterday. That exceeded the $7.23 billion average of analysts’ estimates compiled by Bloomberg.

Chief Executive Officer Larry Page, who succeeded Eric Schmidt in April, is benefiting from Google’s leadership in search advertising, even as the company pushes into new markets such as mobile, display and social networking. Google, which makes most of its money from search ads, should take 76 percent of the U.S. market this year, up from 74 percent in 2010 and 70 percent in 2009, according to research firm EMarketer Inc.

“The core business is the money pump,” said Colin Gillis, an analyst at BGC Partners LP who rates the stock a “buy.”

Google rose 5.8 percent to $591.68 at 4 p.m. in New York. The shares have declined less than 1 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. Profit, excluding some items, was $9.72 a share, beating the $8.76 average estimate.

Shift Online

The number of clicks on ads rose about 28 percent in the third quarter from the year-ago period, while the average cost per click increased approximately 5 percent, the company said.

“It’s the continual secular shift of people spending more online,” said Herman Leung, an analyst at Susquehanna International Group in San Francisco. “They’re benefiting from higher volume and higher click-through. Google’s implementing a lot of advertising improvements.”

Page is trying to fend off competition from Facebook Inc., the biggest social network, with a project called Google+. The service now has more than 40 million users, up from more than 10 million in July.

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

The company said today it plans to shut down the Google Buzz social service to instead focus on Google+. The company also is closing down Code Search, a product to search for open source code on the Internet, and Jaiku, which lets users send updates to friends, the company said on its blog.

Google’s Velocity

“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 said during a call with analysts.

Page held steady on the pace of hiring in the period. 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. (MSFT), 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.

Internet Search

Google also has made gains in the number of Internet searches it handles. 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 share fell to 15.5 percent from 16.3 percent. Microsoft was unchanged at 14.7 percent.

Google’s Android software, meanwhile, has emerged as the biggest smartphone operating system, bolstered by HTC Corp. (2498), Samsung Electronics Co. and Motorola Mobility Holdings Inc. adopting the software. Revenue from mobile advertising is on pace to reach $2.5 billion on an annual basis, Page said.

With the growth, Google and device makers have faced legal challenges from companies such as Oracle Corp. (ORCL) 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 Android devices 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.”

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