Google Still Flying High: DURING A WEEK OF STRONG EARNINGS, GOOGLE BEATS WALL STREET ESTIMATES

Oct 19, 09:13 AM

Current Headlines: By Elise Ackerman, San Jose Mercury News, Calif.

Oct. 19--Google became the latest Silicon Valley heavyweight to beat its numbers Thursday, reporting quarterly profits that were 13 cents more than Wall Street expected, despite the largest three-month hiring spree in its existence as a public company.

Earlier this week, Yahoo, eBay, Intel, Seagate and Genentech all brought good news to investors as strategies for increasing sales paid off.

Indeed, the entire information technology sector has done well this year, with operating earnings increasing more than 12 percent compared with last year, according to an analysis by Standard & Poor's.

Howard Silverblatt, a senior index analyst with S&P, said tech has both the advantage of being less tied to consumer spending than other sectors of the market and of having global operations.

In a conference call with analysts, Google Chief Financial Officer George Reyes, who is slated to retire at the end of the year, said the Mountain View company benefited from improvements made in the quality of ads it shows to users of its famous search engine. Similar Google ads also appear on Web sites that belong to Google's AdSense network.

Changing foreign exchange rates also worked in Google's favor, adding $121 million in additional revenue in the third quarter than if the rates had remained constant.

Google's revenue from outside the United States was $2.03 billion, or 48 percent of total revenue of $4.23 billion.

Investors who bid up Google's stock more than $100 during the past month were not disappointed.

Google said net income increased 46 percent to $1.07 billion or $3.38 a share. Excluding stock-based compensation, Google said it earned $3.91 a share.

Analysts surveyed by Thomson Financial had been expecting that number to be $3.78. They also expected revenue to be $2.9 billion, excluding costs paid to other Web sites for hosting Google ads. Instead, Google reported a figure of $3.1 billion.

Google's stock closed at $639.62 in regular trading Thursday, up about 1 percent. Since the beginning of the year, Google has risen 39 percent.

Google also has continued to hire at a breakneck pace, adding 2,130 employees, more than any other quarter since the company went public. Google now employs a total of 15,916 people. However, capital expenditures declined in total dollars to $553 million compared with $575 million for the quarter ended June 30.

Analysts had been increasingly concerned about Google's spending on both payroll and IT infrastructure. In the past, young, rapidly growing technology companies have sometimes struggled to keep costs under control.

In a conference call with analysts, Chief Executive Eric Schmidt said the surprisingly large number of new hires was due to college graduates joining Google after accepting job offers months earlier. He added that 300 of the new employees came from Google's recent acquisition of Postini, which makes e-mail software.

Sandeep Aggarwal, an analyst with Oppenheimer, said he sees the increase in head count as one of Google's strengths.

"We often forget Internet advertising is still a young industry and there is a lot of hand-holding required for the largest advertisers," he said.

Schmidt and other executives highlighted new formats Google has developed for video advertising and said they saw a lot of promise in targeting ads seen on television as well as on mobile phones.

In addition, co-founder Sergey Brin said Google is also working on a new technology for selling ads on social networks. Brin said the huge quantities of text created on social networks is harder to match with relevant advertising. Last year, Google agreed to pay News Corp. a minimum of $900 million to sell advertising on MySpace, its social networking site.

Co-founder Larry Page indicated that Google may not be a serious contender in an upcoming Federal Communications Commission auction of valuable electromagnetic spectrum.

"We don't feel there is any desperate need for us to have to bid to win," he said.

Investors have been worried that Google might seriously embark on building its own telephone network at a cost of billions of dollars.

Contact Elise Ackerman at eackerman@mercurynews.com or (408) 271-3774.

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