Google trumps Wall Street targets, shares soar
New York, October 15, 2010
Google eased fears that big spending would erode margins as its results blew past Wall Street's targets, and the Web search leader revealed for the first time the strength of its fledgling mobile and online display ad businesses.
Analysts said strong growth across Google's core advertising business led to a 25-percent surge in net revenue in the third quarter, sending its shares 9 percent higher.
"This is the best performance they've had in three years. We're back to the old Google we know and love," said RBC Capital Markets analyst Ross Sandler.
"Clearly search is holding up better than anyone expected," while efforts to branch into display and mobile advertising are on track to become significant parts of the business, he noted.
Investors had feared that Google, seeking new sources of growth, was spending recklessly on initiatives such as its Android mobile software, acquisitions, renewable energy projects and even automated cars, with uncertain returns.
In July, Google's second-quarter earnings fell short of Wall Street expectations, marking the first time in two years that the company had missed profit estimates.
But executives on Thursday offered investors what they said was a one-time glimpse of sales generated by its mobile and display advertising businesses.
Those operations generated annualized revenue run rates of more than $1 billion and $2.5 billion, respectively -- underscoring the outcome of investments into smartphones and online projects.
Google disclosed two revenue numbers to give Wall Street "confidence that where we're investing in is really fueling great growth rates," chief financial officer Patrick Pichette told analysts on a conference call.
Kaufman Brothers analyst Mayuresh Masurekar said Google's $1 billion run rate in mobile was higher than investors had expected, but he noted that the $2.5 billion run rate in display advertising was a gross number, meaning that some of that revenue is paid to Google's partners.
Still, he said, the numbers should ease investor concerns about the company's spending. "It shows that the investments that management is making, like the ones that they made in the past, ... are bearing fruit," Masurekar said.
Analysts also pointed to a 16-percent jump in "paid clicks" on Google's search advertisements, while earnings handily surpassed expectations despite hiring at a near-record pace and a one-third jump in operating costs. - Reuters