Google profit up on strong advert sales

Google Inc's quarterly earnings beat Wall Street forecasts as strong advertising sales on its self-branded websites helped the Internet leader defy the gloom pervading the tech sector.

The results, which sent Google shares up 2.6 percent in after-hours trading, were a relief for investors who had been stunned by a series of dismal reports from Microsoft Corp, Intel Corp and other tech companies.

"At least we have something to feel good about with this Google news in what has been shaping up to be a gloomy earnings period," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion.

"It tells me that Google is very focused on their franchise and execution as a marketing, advertising and media company. It speaks highly to their business focus."

Google said fourth-quarter net income fell to $382 million, or $1.21 a share, from $1.21 billion, or $3.79 a share, a year earlier due to impairment charges on its investments in Clearwire Corp and Time Warner Inc unit AOL.

Excluding one-time charges, profit was $5.10 a share, beating the average analyst forecast of $4.95 according to Reuters Estimates.

Revenue rose 18 percent to $5.7 billion -- a shadow of the 50 percent growth levels that Google used to enjoy, but considered by analysts to be a robust performance given the weak economy and corporate cutbacks in advertising spending.

"It was, all things considered, very good numbers," said Wunderlich Securities analyst Martin Pyykkonen, noting Google's non-GAAP operating margin of 38 percent was also solid.

"In this market and relative to the numbers that are being put out -- and I would go so far as to say relative to the numbers that Yahoo probably will put out next week -- these will look good and maybe I'll use the term 'as good as it gets' as far as Internet stock performance goes."

WEAKNESS IN UK MARKETS

Google's revenue comes via searches on its branded sites such as google.com and google.co.uk, as well as through partnerships which license its search advertising platform.

Google-owned sites generated 67 percent of revenue, or $3.81 billion, rising 22 percent from a year ago. Traffic acquisition costs, the portion of revenues shared with Google's partners, decreased to $1.48 billion.

Cantor Fitzgerald analyst Derek Brown, who has a buy rating on Google and makes a market in its shares, said that was better than he had expected.

"It's clear that macroeconomic challenges continue to rob Google of growth, but it seems equally clear that the company continues to make headway in this market, and take share in this market," Brown said.

Google Chief Executive Eric Schmidt struck a cautious note, saying the last quarter had benefited from the holiday season.

"Now clearly we're in a worldwide recession as everybody knows, rising unemployment, foreclosures, that sort of thing," he said on a conference call. "But we don't know how long this period will last. We obviously hope it will be short."

Chief Financial Officer Patrick Pichette said Google's UK business showed "some softness" largely due to the weak British pound. UK revenue fell 1 percent to $685 million.

But the rest of Europe performed better, driven by strong performances in Germany, France and the Netherlands, Google said. Overall international revenue, which accounted for 50 percent of total revenue, was relatively flat.

Paid clicks -- a measure of how often Google gets paid for advertisements alongside its Web search results -- rose 18 percent. Investors have worried that Google's paid search business would face keyword pricing deflationary pressures due to the worsening economy, but the company said search query growth was strong with revenues up in most verticals.

Google's stock has fallen by more than half in the last year as investors expected its pay-per-click advertising format to be hit by the wider advertising market slump.

The shares rose to $314.51 in after-hours trading from their Nasdaq close of $306.50.

Just 13 months ago, Google's stock hit an all-time high of $747 as investors bet moves into new advertising formats such as mobile phones and YouTube would bring in huge returns.

Google joins International Business Machines Corp and Apple Inc as the few bright spots in a tech sector hurt by sweeping job cuts and cutbacks in corporate and consumer spending.

It has stepped up efforts to rein in expenses, to the relief of Wall Street and investors. Late last year, it confirmed that it was cutting back on the use of contractors and earlier this month it laid off 100 recruiters -- significant for a company which has previously hired at a rapid pace.

Google sales jump 18pc

The Mountain View, Calif.-based company reported an 18pc jump in fourth-quarter revenue to $5.7 billion for the period ended Dec. 31. That's up from $4.83 billion in the year-earlier quarter.

Excluding commissions paid to advertising partners, Google posted sales of $4.22 billion, better than the $4.12 billion in sales expected by analysts polled by Thomson Reuters.

Google reported fourth-quarter net income of $382 million, down 68pc from $1.2 billion a year ago. However, excluding certain charges, such as the cost of employee stock options, the company earned $5.10 a share, much better than consensus estimates of $4.95 per share.

"We had tight control over costs" in the quarter, said Google chief executive Eric Schmidt in a conference call with analysts.

"We don't know how long this period will last," Schmidt said, but he added that Google remained focused on long-term growth.

Schmidt pointed to the scaling back of non-profitable Google projects such as Google Video, Google Notebook, and status update service Jaiku. He also mentioned a quarterly decline in costs paid to advertising partners.

"Google continues to take market share, and they continue to have any number of levers to pull on both the revenue and the cost side that makes them very formidable in any economic environment," said Derek Brown, analyst with brokerage Cantor Fitzgerald.

Over the last quarter of 2008, Google said it spent about $368 million on capital expenses - mostly on data centers, servers and networking equipment.

As of Dec. 31, Google said it employed 20,222 full-time workers, slightly up from the 20,123 it employed at the end of September.

In order to retain employees, Google also announced that it would be starting a stock option exchange program from the end of January through early March.

According to Schmidt, many of the current options would cost more to exercise than they are worth. The plan will allow employees to exchange old options for new, and the company will count them as stock-based compensation in the first quarter.

Google's stock has dropped 25pc during the most recent quarter, and it fell off more than 56pc through 2008.

(Additional reporting by Anupreeta Das and Jennifer Ablan in New York, Gina Keating and Sue Zeidler in Los Angeles, and Jim Finkle in Boston, writing by Tiffany Wu, editing by Richard Chang)

reuters.com and cnn.com