Expectations were high for Google’s Q3 given some of the positive reports coming out about clicks and search volumes from third parties such as Efficient Frontier and comScore. Even though Google performed solidly (almost $6 billion in a still-bad economy) there may be some disappointment on Wall Street (apparently not). Google’s Eric Schmidt said “The worst of the recession is behind us.” He added, “We’re very pleased with the third quarter.”
Google apparently did better than consensus estimates and so “beat the street.” Shares are now up in after-hours trading.
Most metrics were flat. Here are the earnings release and associated highlights:
Google reported revenues of $5.94 billion for the quarter ended September 30, 2009, an increase of 7% compared to the third quarter of 2008. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the third quarter of 2009, TAC totaled $1.56 billion, or 27% of advertising revenues . . .
- GAAP operating income in the third quarter of 2009 was $2.07 billion, or 35% of revenues. This compares to GAAP operating income of $1.65 billion, or 30% of revenues, in the third quarter of 2008. Non-GAAP operating income in the third quarter of 2009 was $2.39 billion, or 40% of revenues. This compares to non-GAAP operating income of $2.02 billion, or 37% of revenues, in the third quarter of 2008.
- GAAP net income in the third quarter of 2009 was $1.64 billion, compared to $1.29 billion in the third quarter of 2008. Non-GAAP net income in the third quarter of 2009 was $1.88 billion, compared to $1.56 billion in the third quarter of 2008 . . .
Google Sites Revenues – Google-owned sites generated revenues of $3.96 billion, or 67% of total revenues, in the third quarter of 2009. This represents an 8% increase over third quarter 2008 revenues of $3.67 billion.
Google Network Revenues – Google’s partner sites generated revenues, through AdSense programs, of $1.80 billion, or 30% of total revenues, in the third quarter of 2009. This represents a 7% increase from third quarter 2008 network revenues of $1.68 billion.
International Revenues – Revenues from outside of the United States totaled $3.14 billion, representing 53% of total revenues in the third quarter of 2009, compared to 53% in the second quarter of 2009 and 51% in the third quarter of 2008. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the second quarter of 2009 through the third quarter of 2009, our revenues in the third quarter of 2009 would have been $166 million lower. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the third quarter of 2008 through the third quarter of 2009, our revenues in the third quarter of 2009 would have been $297 million higher.
Revenues from the United Kingdom totaled $765 million, representing 13% of revenues in the third quarter of 2009, compared to 14% in the third quarter of 2008.
Earnings call and Q&A excerpts:
Google CFO Patrick Pichette said that Google was going to resume investments and hiring, “especially in engineering and sales.”
Nikesh Arora, President, Global Sales Operations, cited growth of YouTube advertising and brand advertiser use of YouTube. He also cited UK deals to bring full-length TV programming to the site. He added that there were “over 1 million publishers” in the Google content network. And he said “over half of the top 25″ ad networks are “already using” for the new DoubleClick exchange.
Product SVP Jonathan Rosenberg comes on to discuss “long term bets and investments.” He first discusses the favorable response to the new AdWords interface and infrastructure. He cites Local Listing Ads and their simplicity for small businesses. He says that all calls generated through the program “go through Google Voice” (call tracking). He says there are 50 million Place Pages and now “Everything is finally in place to enable small businesses to connect with customers online.”
Rosenberg talks up Search Options, Chrome, Chrome Frame and the DoubleClick ad exchange. We’re making it easier for advertisers to run ads across a broader range of publisher sites and opening up the display ad ecosystem. Roughly 25 percent of all online display inventory remains unsold.
Question about acquisitions at Google:
Eric Schmidt: We’ve historically done an acquisition . . . one a month or so . . . and they’re usually small to complete an offering. He cites Chrome, Android and Search as areas where acquisitions are likely. Large acquisitions may happen “every year or two.”
Jonathan Rosenberg: We’ve taken steps that ensure that major outages won’t happen again (referring to Sept. 1 outage). We’ve learned a lot from it.
Capital spending decreases:
Schmidt said that capital spending had declined because of greater efficiency.
Android adoption vs. other smartphones:
Rosenberg: Look at the scope of growth with carriers and devices. The open ecosystem of developers and carriers is “paying off” and going very well.
Schmidt: Android adoption is about to explode. This is a very critical period.
Plans for Google’s large cash balances:
Schmidt: We love cash. There’s no stock buyback being considered. Cash provides strategic flexibility.
Verticals with spending improvement Q2 vs. Q3:
Nikesh Arora: Auto performed well partly because of cash for clunkers. Retail is recovering. Finance is “tough.” Pockets within finance are “robust,” like insurance.
Patrick Pichette: We’re really pleased about YouTube’s performance. It’s going really well. YouTube is on a path to profitability “in the not-too-distant future.” We’re monetizating more than a billion video views every week.
Nikesh Arora: 90 percent of YouTube homepage inventory was sold out in Q3 in the US. We’ve closed deals with everyone in the music business. Pleased so far “and we like the trend.”
Patrick Pichette: I don’t like the word “dominant.” We build great products and they’re winning in the market.
Schmidt: We’re happy to have businesses that have different margins; we don’t have margin targets. We’ll accept the “native margin” structures of Google’s various businesses — as long as they’re winning in the market.
TeleAtlas removed from Maps:
Rosenberg: We’re using the new system in the US and Mexico. The data are coming from a wide range of sources including Street View, Census bureau, overhead imagery, local knowledge (UGC) — it gives us lots of flexibility to create different types of maps. It allows us to launch better Place Pages and is quite significant.
(Implication is new system will be global in time.)
Mobile search and monetization:
Pichette: Q over Q, mobile searches grew 30 percent on Google. “New types of searches (emphasizes local/LBS) create new monetization opportunities.”
Headcount in the future:
Pichette: We’re delighted that we’re able to fund headcount growth. But it’s really about finding the best engineers, the “best minds.” You have to “find the right Googler.”
Schmidt: In terms of recruiting I think we do it well.
Mysteriously there were no questions about anti-trust or the Book Search settlement or plans in that area.