Economy stalls, but Google's 3Q profit still rises

[October 17, 2008]  SAN FRANCISCO (AP) -- The economy is sputtering, but Google Inc.'s profits are still accelerating at a rate that suggests the Internet search leader can remain a marketing magnet even when advertisers and consumers aren't in a spending mood.

Google provided the latest evidence of its moneymaking prowess late Thursday with the announcement of a 26 percent increase in third-quarter profits that surpassed analysts' forecasts.

The performance drew a sigh of relief from investors, who had become convinced that Google will suffer along with just about everyone else as the U.S. economy sinks into what is widely expected to be the deepest recession in a quarter-century.

Google shares surged $36.97, or 10.5 percent, in Thursday's extending trading after finishing the regular session at $353.02, up $13.85. It marked a dramatic change in sentiment from earlier Thursday as a cascading wave of pessimism pounded Google's stock price to a three-year low of $309.44.

"People suddenly realized that if there a stock you are going to own through this uncertainty, (Google) is the one," said Canaccord Adams analyst Colin Gillis.

But not even Google feels immune to the worst financial crisis to grip the world since the U.S. stock market crashed in 1929.

Things are looking grim enough to prompt Google -- renowned for its free-spending ways -- to hunker down and start scrimping more than it has in the past.

"This may turn out to be the quarter (Google) grew up and proved it can control expenses," Gillis said.

Google Chief Executive Eric Schmidt also offered some of his most sober commentary yet about the state of the economy. "We're all sort of in uncharted territory," Schmidt told analysts during a Thursday conference call.

Google nimbly navigated through the shoals in the third quarter, earning $1.35 billion, or $4.24 per share. That compared to net income of $1.07 billion, or $3.38 per share, at the same time last year.

Excluding costs for employee stock compensation, Google said it would have made $4.92 per share. That figure surpassed the average estimate of $4.75 per share among analysts polled by Thomson Reuters.

Revenue climbed 31 percent to $5.54 billion. After subtracting advertising commissions, Google's revenue totaled $4.04 billion -- about $20 million below analyst estimates.

Google executives have maintained that the company can still thrive because its technology does a better job of finding customers at a lower cost to advertisers than traditional marketing campaigns. Those factors, Google argues, means it could receive an even bigger slice of advertising budgets in a crumbling economy.

What's more, consumers scrambling to make ends meet may be more likely to use the Internet to hunt for bargains -- a quest that could increase the Google search requests that spit out ads.

Schmidt, though, acknowledged that even the Internet's most profitable company is facing a more daunting challenge now than when the third quarter began.

"It is pretty clear the economic situation today globally is worse than people were predicting a month ago," he said during the conference call. He and other Google executives dodged questions about how ad sales have fared as the economic outlook darkened during the past month.

Google co-founder Sergey Brin predicted the company will emerge from the turmoil even stronger. "My favorite time to manage is during a bust," Brin said in a Thursday interview with The Associated Press. "It brings more clarity about what your customers need and what your priorities should be."

Keeping a closer eye on expenses is a change for Google, which takes pride in spending heavily to treat its employees to free meals and expand the capacity of its data centers that run its search engine, e-mail and other products.

While Google plans to continue feeding its employees for free, the company already has shortened the operating hours of some cafes and, in some instances, is offering two entrees instead of three, Brin said. The company also is reducing the number of contractors it uses.

In another indication of a tightening budget, Google's capital expenditures in the third quarter totaled $452 million, an 18 percent decrease from last year.

That's the lowest amount Google has spent on capital expenditures since the fourth quarter of 2006. Chief Financial Officer Patrick Pichette attributed the sharp decline to the company's fluctuating needs for additional computers, and said spending in that area could rise again.

Google clearly is managing its payroll more carefully. The company hired another 519 workers during the quarter, down from an increase of 2,130 employees at the same time last year. The company now has 20,123 employees.

Even as it curbs its costs, Google's bank account is swelling. The company ended September with $14.4 billion in cash, up from $12.7 billion in June.

Google also is vying to become an even more dominant force on the Internet by selling ads on behalf of its slumping rival, Yahoo Inc. The alliance has been delayed by an U.S. Justice Department investigation into whether the partnership would undercut competition in the Internet advertising market. Schmidt said he hopes to resolve the fate of the Yahoo deal soon.

[Associated Press; By MICHAEL LIEDTKE]

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