New York — The notoriously free-spending Google Inc., showing resilience in the face of a global economic turmoil, fastened its belt in the third quarter and delivered another strong financial performance Thursday that beat analyst expectations and reinforced its claim that search engine advertising can weather tough times.
The results withstood increasing investor skepticism about the company’s resistance to a recession, sending its shares up 10 percent in after-hours trading. Google said revenue increased 31% as Web searchers kept clicking on ads, and profit rose 26% as the company slowed its hiring and cut back on capital expenses.
The Mountain View, California-based company reported diluted earnings per share of 4.92 dollars, better than the forecast of 4.76 dollars per share.“We had a good third quarter with robust traffic and revenue growth across our entire major geographies thanks to the underlying strength of our core search and ads business,” Google chief executive Eric Schmidt said in a statement.
“While we are realistic about the unpleasant state of the global economy, we will continue to manage Google for the long term, driving improvements to search and ads, while also investing in future growth areas such as enterprise, mobile, and display,” Schmidt added.
Wall Street has altered its expectations in recent weeks, worrying that the economic crisis that was punishing other Internet companies would spread even to the search market. The highly targeted form of advertising is believed better suited for weathering a slowdown in consumer spending than others.
While Schmidt, boasting his company’s results, drew particular attention with his depressing comments about the economy and the uncertainty it brings. Nevertheless, he said that advertisers, in general, continued to spend on search engine advertising, probably because it is more targeted to likely customers and measurable than other forms of advertising.
The apparel and home appliance advertising sectors held up well, according to Google. As expected, financial, auto and real estate advertising did poorly.
Clicks by Google’s users on paid ads were up 18 percent in the third quarter, down slightly from the 19 percent growth in the previous quarter.
Its shares, which had lost nearly 20% in the last month, gained 4% to $353.02 and then surged an additional 10% in after-hours trading. The stock had hit a three-year low of $309.44 earlier in the day.
“It was just the shot in the arm that investors needed,” Sanford C. Bernstein analyst Jeffrey Lindsay said.
The figures presented the most direct evidence so far to support predictions by Google executives that their form of “pay-per-click” advertising, in which advertisers only pay when internet users click on their ads, would do better in a downturn than other forms of advertising.
“As marketing budgets are being squeezed, targeted ads are becoming more valuable to advertisers,” said Schmidt. He added Google was benefiting in the downturn as consumers turned to search engines to do more research for bargains, a phenomenon Google executives called “the Wal-Mart effect”.
The company’s strong recent performance suggests that it could end the year on a positive note despite a general downturn in consumer spending in the US. Allen Weiner, an analyst at Gartner, said: “I would not be surprised if they have an enormous fourth quarter.”
Co-founder Sergey Brin said that Google is paying close attention to reining in spending, although the company has a reputation for lavish perks. In addition to keeping hiring in check, he said in an interview that the company has cut travel expenses, events budgets and hours of operation at some of its cafes, which serve free food.
Jason Avilio, an analyst with Kaufman Bros., said that given the circumstances, it was a relatively strong quarter. But he was cautious about drawing too many conclusions from one quarter about the short term, given the wild swings in the economy.
In a conference call with analysts, Schmidt said the Internet search giant still expects to resolve an advertising deal with Yahoo that would put Google technology to work targeting search ads on Yahoo pages.
The deal is presently under examination by the US Department of Justice because of anti-trust concerns over an advertising tie-up between Google and Yahoo; respectively number one and number two in the Internet ad market.
“We are hopefully nearing the end of that period,” Schmidt said. “In my view many of the complaints we have seen come from the fact that many people do not understand how auctions really work.”
Google, which already accumulates more than 70% of U.S. search advertising spending, is looking to spur growth through new advertising strategies. It sees opportunities in products such as online mapping and its video-sharing site YouTube. It also is expanding into new areas such as online software for businesses and display advertising.
“It looks like Google still has pretty good prospects to keep growing for a number of years,” Morningstar analyst Larry Witt said.