Google raises the bar with a 46% profit gain

Times Staff Writer

Google Inc. outgoogled itself in the third quarter.

With the market counting on an aeronautic financial performance from the Internet search leader, Google turned on the afterburners and surpassed even the most bullish expectations that have propelled the stock price into rarefied air.

With a market value just shy of $200 billion, Google on Thursday edged past Cisco Systems Inc. as Silicon Valley’s most valuable company.

Google’s profit jumped 46% to $1.07 billion on a 57% rise in revenue to $4.23 billion, propelled by simple text ads on Web pages.


“It’s an amazing business performance for a company of that magnitude to sustain those levels of growth,” Sanford C. Bernstein & Co. analyst Jeffrey Lindsay said. “We always look for balance, and we are looking very hard to find something negative to say about this quarter, but it’s very difficult. Google improved on all fronts we were hoping it would improve on.”

The Mountain View, Calif., company’s shares have risen nearly 40% since the beginning of the year, including a nearly 20% surge in the last month. They added $6.14 on Thursday to finish the regular session at $639.62, then gained $3.28 more in after-hours trading.

“We’re very pleased with such strong results in what’s seasonally one of our weaker quarters,” Chief Executive Eric Schmidt said during a conference call with analysts. “It’s obvious to us our model continues to work very well.”

Former Google board member and venture capitalist Michael Moritz presaged the performance, which was in doubt after the company disappointed Wall Street with its second- quarter results.


“The leaders of the company worry all the time about things that they think are missing from the product lineup, or strengthening the management team, or competing in markets around the world. This is not a complacent group of people,” Moritz said Wednesday at the Web 2.0 Summit in San Francisco. “What has been wrought at Google . . . is an extraordinary marvel.”

Google is famous for its Web search algorithm. But the company has clearly figured out the right formula for profit, said Jackson Securities analyst Brian Bolan. He ticked off the highlights: strength in the search advertising business and in brokering ads that appear on partners’ websites; solid revenue growth; tightened cost controls despite continued rapid hiring.

He says he sets the bar higher than most Google analysts, but Google exceeded his projections.

“You have to be really good to beat me,” Bolan said.


Google earned $3.38 a share, up from $2.36 a share a year earlier. Had it not continued to lavish stock on its bulging workforce, Google would have earned $3.91 a share, exceeding the average of $3.78 predicted by analysts surveyed by Thomson Financial.

Revenue increased to $4.23 billion from $2.69 billion. Taking into account commissions paid to advertising partners, Google racked up $3.01 billion in revenue, about $70 million above the average analyst estimate.

It was a welcome turnaround after Google’s second-quarter profit fell short of expectations as the cost of hiring 1,548 employees dragged on the numbers.

The hiring binge continued in the third quarter when Google added 2,130 employees, bringing its staff to 15,916. The additions included 1,000 hires out of college and 300 employees Google picked up in its $625-million acquisition of e-mail company Postini Inc.


In an interview, Google co-founder Sergey Brin said Google would scale back on hiring in the current quarter.

“You cannot turn on a dime,” he said.

Even with higher expenses, Google continues to prosper because of its dominance in online advertising. Google handled 57% of U.S. search queries in September, up from 56.5% in August, according to ComScore Inc.

Google executives underscored their experiments with new ways to distribute ads, including in videos from Google’s YouTube subsidiary, in interactive widgets and on television through its partner EchoStar Communications Corp. They also highlighted success in selling ads on mobile phones, particularly in Asia -- a possible prelude to an announcement of a mobile operating system or even the often-rumored “Gphone.”


Schmidt said he remained confident that regulators would approve Google’s $3.1-billion acquisition of DoubleClick Inc., an online ad placement service that would further bolster efforts to dominate online advertising.