Google Wows Market With 46% Q3 Earnings Gain

by Tameka Kee, Oct 19, 2007, 6:00 AM

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Recovering nicely from a weaker-than-expected second quarter, Google's Q3 07 numbers fulfilled and surpassed many analysts' expectations, with the search giant posting earnings of $1.07 billion (up 46% year-over-year) and free cash flow of over $1.8 billion.

Buoyed by the launches of multiple advertising products and a push into international and emerging markets, Google's revenue grew by 57% year-over-year (and 9% from Q2 07) to reach more than $4.2 billion. After paying out commissions to advertising partners, revenue still came in at over $3 billion.

CEO Eric Schmidt said the company was "pleased with the strong results," for both the core search product and advertising services.

With search, paid clicks grew 5% from last quarter--and 45% year-over-year. According to Larry Page, Google's co-founder and President, Products, Google's focus on improving search quality--particularly in markets outside of North America--is what fueled traffic surges in countries like Russia, Thailand and Japan. Meanwhile, mobile search traffic increased in both domestic and international markets.

Although the company typically does not offer revenue information for each of its ad products separately, CFO George Reyes noted that AdSense revenue hit $1.8 billion in Q3, an 8% increase from Q3 06.

Sergey Brin, Google's co-founder and President, Technology, highlighted two new ad services aimed at helping advertisers craft more measurable, ROI-driven campaigns--a conversion optimizer currently in beta, and a Web site optimizer that lets site owners tweak landing pages and other characteristics for maximum ad coherence.

Brin also noted that Google's Gadget Ads and video units (for both AdSense and YouTube) were examples of how the search giant continues to invest in more interactive technologies. When asked about a time frame for "turning up the dial" on YouTube monetization, Brin said things are progressing, but revenue generation is not the number one priority.

In terms of whether the overlay ads would be used in the future as opposed to pre- or post-rolls, Brin said: "We're pleased with the overlay, but we'll continue to test a variety of different formats." He reminded analysts that the company started with text ads and it "took a long time to perfect them," and that Google looks at YouTube as a long-term investment.

Top brass sidestepped questions about possible investments in Facebook or the FCC's upcoming 700 mHz spectrum auction. "We can't comment on specifics," Schmidt said, when asked about Google's wealth of free cash flow. "But the cash is not burning a hole in our pockets. We would do an investment if we thought it was incredibly strategic."

Schmidt added that the company didn't necessarily need to invest directly in a social network to benefit from the Web 2.0 phenomenon.

One area Google continues to spend money in is human resources--adding over 2,100 new employees (roughly 600 more than last quarter). While 300 of those new hires came from the Postini acquisition, the majority were sales and marketing staff--particularly in international markets.

One subject noticeably absent from the call was the status of the $3.1 billion DoubleClick deal, which is undergoing federal review. Antitrust experts have said they expect the deal will be approved, although conditions on use of consumer data could be attached to that approval.

Google stock closed at $639 in New York before the call, and was up $3.88 in after-hours trading.

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