Google's results defy downturn

By Jessica Guynn

Oct. 17, 2008 12 AM PT

Times Staff Writer

SAN FRANCISCO —

The notoriously free-spending Google Inc. cinched its belt in the third quarter and delivered another strong financial performance Thursday, defying fears that it would fall prey to the growing economic turmoil.

Google said revenue increased 31% as Web searchers kept clicking on ads, and profit rose 26% as the company slowed its hiring and cut back on capital expenses.

Its shares, which had lost nearly 20% in the last month, gained 4% to $353.02 and then surged an additional 10% in after-hours trading. The stock had hit a three-year low of $309.44 earlier in the day.

“It was just the shot in the arm that investors needed,” Sanford C. Bernstein analyst Jeffrey Lindsay said.

Wall Street had lowered its expectations in recent weeks, worrying that the financial crisis that was punishing other Internet companies would spread even to the search market. The highly targeted form of advertising is believed better suited for weathering a slowdown in consumer spending than others.

Net income rose to $1.35 billion, or $4.24 a share, from $1.07 billion, or $3.38 a share, a year earlier. Excluding costs such as stock-based compensation, profit was $4.92 a share. Revenue climbed to $5.54 billion from $4.23 billion a year earlier.

In the U.S., Google fielded 63% of online searches in August, double the combined market share of its two closest competitors, Yahoo Inc. and Microsoft Corp. The spreading financial crisis is expected to hurt the Internet advertising market as businesses large and small cut spending or disappear altogether.

Yahoo shares surged 10.5% to $12.99 on Thursday after Microsoft Chief Executive Steve Ballmer suggested that his company would consider renewing discussions with Yahoo over a search partnership. A Microsoft spokesman said later Thursday that the two companies were not in discussions, adding, “Microsoft has no interest in acquiring Yahoo.”

Microsoft had offered as much as $47.5 billion this spring to acquire Yahoo to better compete against Google. Yahoo spurned the offer and struck an advertising partnership with Google.

Google CEO Eric Schmidt said he was unaware of the comments.

The spreading financial crisis has hammered the stocks of many Internet companies. Schmidt described the current economic predicament as “uncharted territory.”

Although Google fared well in the quarter, it is unclear whether the Mountain View, Calif., company will remain immune. Schmidt said Google intended “to be very responsible in the management of our expenses.”

“What we have concluded is that we are going to keep doing our thing,” Schmidt said in an interview. “There is no change in the plan at Google. We’ll ride this thing out.”

Google added 519 employees, down dramatically from 2,130 a year earlier, in what is typically a big hiring quarter. The company now has 20,123 employees. Capital expenditures fell 18% from the second quarter to $452 million.

That was a pleasant surprise from a company that gives its employees free meals and other perks and is known as much for being free-spending as it is freewheeling, analysts said.

“It probably wasn’t the leanest ship on the sea,” said Anthony Valencia, media analyst for TCW Group in Los Angeles. “Now they have shown they can rein things in and show good profitability without hurting continued investment in long-term growth initiatives.”

Google, which already collects more than 70% of U.S. search advertising spending, is looking to spur growth through new advertising strategies. It sees opportunities in products such as online mapping and its video-sharing site YouTube. It also is expanding into new areas such as online software for businesses and display advertising.

“It looks like Google still has pretty good prospects to keep growing for a number of years,” Morningstar analyst Larry Witt said.

Its controversial search advertising partnership, which would allow Yahoo to show search ads sold by Google, is under antitrust review by the Justice Department. Schmidt said that Google was “in active conversations” with the Justice Department but that he was unsure when the review would be completed.

He declined to discuss any concessions Google and Yahoo would be prepared to make, adding: “Settlement is too strong a word.”

jessica.guynn@latimes.com