What Google's blowout quarter means

Company revenue still mostly from advertising; good news for ad sector

By Jim J. Jubak Oct 16, 2009 2:49PM

Jim JubakGoogle's (GOOG) strong earnings report indicates something, but just what?

On October 15th, after the market's close, Google reported earnings of $5.89 a share, 47 cents a share above the consensus estimate of $5.42. Revenue, after traffic acquisition costs, climbed 8.4% from the third quarter of 2008. That was about $160 million ahead of the Wall Street consensus of $4.24 billion.

But what do the numbers mean?

I know it's commonplace to put Google in the technology sector -- I do it myself -- but despite its huge technology footprint, the company's revenue still comes mostly from advertising. 

So first, Google's good news is good news for the ad sector -- at least for the online ad sector. Aggregate paid clicks grew by 14% from the third quarter of 2008. That was a percentage point less than Wall Street had forecast, but still represents very healthy growth -- for Google and maybe for the economy as a whole.

Unless, of course, Google is getting its growth by taking ad share from more traditional media plays. Investors will get a sense of that when The New York Times (NYT) reports on October 22nd.

In 2009, according to Magna Global, search advertising as a whole will grow 3.6% in the United States while ad spending as a whole falls 15%.

Second, Google's good news is definitely good news for the technology sector -- even if not in the way that most investors think. The company was encouraged enough by what it saw in its business this quarter to say that it believes the worst of the recession is over. And that means that the company now feels "confident about investing heavily in our future," chief executive officer Eric Schmidt said.

That's good news for the technology companies that would sell stuff to an expanding Google. That would reverse the cuts in capital spending that Google made as the recession deepened. The company's capital spending fell to $186 million in the third quarter from $452 million in the third quarter of 2008.

And third, Google's good news is good news for technology start-ups. CEO Schmidt said that Google is back on the acquisition trail, looking for small companies that will add to its dominance of the Internet search market or build off that to move the company into new products. That should help start-ups do everything from raise initial cash to go public.

In the quarter, Google increased its market share, despite the launch of a new search engine, Bing, by Microsoft (MSFT). (I added Microsoft to Jubak's Picks on July 24th. For the original logic behind that pick, see my post).

Google took 64.9% of the search market in September, according to ComScore, up slightly from 65% in May. Microsoft's share grew to 9.4% from 8% and Yahoo's (YHOO) share fell to 18.8% from 20.1% over that period.

At the time of this writing, Jim Jubak owned shares of Microsoft in his personal account.



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