Google Says Worst of Recession Is Over, ‘Open for Business’ on the M&A Front

By Andrew LaVallee

Google posted third-quarter profit of $1.64 billion, up from $1.29 billion a year ago, while revenue climbed 7% to $5.94 billion.

“While there is a lot of uncertainty about the pace of economic recovery, we believe the worst of the recession is behind us and now feel confident about investing heavily in our future,” Eric Schmidt, the search giant’s chief executive, said in a statement.

On its call with analysts, Google typically gives its take on the broader economic environment, particularly advertising, in addition to how its business fared. It also usually gives updates on individual product lines, like search, YouTube and mobile, before the Q&A starts. (See the Q2 and Q1 recaps)

Highlights from today’s call:

4:26 p.m. EST: A few stats from the news release while we wait: Non-U.S. revenue was $3.14 billion, 53% of total revenue — year-earlier quarter saw 51% outside the U.S. United Kingdom revenue was 13% of total revenue, down from 14%.

Clicks to ads on Google and partner sites increased 14%, while average cost-per-click was down 6%.

Google employed 19,665 full-time workers as of Sept. 30, compared with 19,786 on June 30.

4:32: Call starts. The cast is the same as last quarter: Mr. Schmidt, CEO; Patrick Pichette, CFO; Jonathan Rosenberg, SVP of product management; and Nikesh Arora, president of global sales operations and business development. But there’s a twist — they’ll be using Google’s moderator to vet questions with voters. They vote on “the most relevant questions,” which go to the Google execs, the operator says.

4:35: “While there’s obviously a lot of uncertainty about the pace of the economic recovery, we believe the worst of the recession is behind us,” Schmidt says.

He adds that Google now has the confidence to invest “heavily” in its future. “It’s all good news from our perspective, at least in looking at the quarter.”

4:37: Says “we want to really get to the perfect search engine” and that many advertisers would like to spend more with Google if the company’s product allow them to do that.

4:38: Schmidt says “we’re open for business in making strategic acquisitions, both large and small.”

4:39: It’s Pichette’s turn. “At a high level, we’re very pleased with our Q3 results,” he says. The quarter benefited from growth in AdSense for content and display initiatives.

4:41: U.S. revenue up 4% to $2.8 billion. U.K. revenue decline affected by foreign exchange as well as ongoing macroeconomic weakness, Pichette says.

4:42: Operating expenses rose from the prior quarter, mostly due to payroll, equipment and facilities-related expenses.

“We believe the worst of the recession is behind us,” he says.

4:44: Brazil was a standout in Latin America, Arora says. We’re beginning to see signs of recovery in Europe and Africa, particularly Spain. In Asia, China performed strongly as an emerging market.

4:46: Looking at the display-advertising business, those have also shown strong results, he says. On YouTube, new advertisers and partners are helping with monetization efforts. Ninety percent of the top 50 advertisers have run YouTube campaigns with successful results — recent examples include McDonald’s and Hewlett-Packard.

4:47: YouTube has signed deals with all four major record labels and several independent labels. Earlier today, Google announced a partnership with Channel 4 in the U.K., which will bring full-length programming to the video-sharing site.

4:48: Arora adds a personal shout-out to the sales team.

4:50: Rosenberg calls the new AdWords front-end one of the company’s biggest investments of the year. Advertisers have new reports, can run more efficient campaigns and can get new features faster thanks to the platform, he says. Also testing a new offering for local ads — a one-page form, no keywords, no bidding, just a flat monthly rate. About 50 million “place pages” already launched. The phone numbers on the ads go through Google Voice, so they can be tracked.

4:51: Users are using more complex queries, he says, so Google is developing new ways for them to work with the results — being able to filter out commercial results if you want to read reviews, for example.

4:53: Display advertising “still a highly inefficient industry,” Rosenberg says. About a quarter of publisher space goes unused.

4:54: The crowdvoted Q&A begins. First question is: What are your goals with the recently relaunched DoubleClick ad exchange?

4:55: Rosenberg says “We’re making great progress with fixing the whole fractured and very complex ad ecosystem,” but we need to make it easier for advertisers to run broad campaigns and grow the pie for all players.

4:56: Imran Khan of J.P. Morgan asks for clarity on the 6% cost-per-click decline. Arora says foreign exchange had an impact but stresses the rise in paid clicks. “We’re not worried about lower CPCs when you get dollars and more performance.” Rosenberg adds that more clicks are coming from countries with lower CPCs.

4:57: What’s the M&A outlook? Schmidt says there’s no particular rhyme or reason but notes that they’re looking for larger businesses to buy, if they have a major user base. DoubleClick and YouTube look like they’re going to be “incredibly successful,” he says.

5:00: Rosenberg calls the early-September Gmail outage “a very big deal to us.” Google has taken steps to prevent it from happening again and is also working on improving recovery time if outages happen again.

5:03: Ross Sandler from RBC asks if Google is seeing higher conversion rates. Arora says “we don’t comment on precise metrics and conversion rates,” but says on the consumer side, “we’re seeing rational behavior.” The rates seem to be holding up.

5:04: Rosenberg fields a question on Android, Google’s mobile-operating system. He notes the big jump in Android-powered cellphones. “The strategy’s working,” he says.

Chrome OS “is going very well,” he adds. More updates to come later in the year.

5:05: “Android adoption is literally about to explode,” Schmidt says. Internal demos of Chrome OS indicate it is quite different from the incumbents, but it’s not quite done yet. Hope to get a version out later this year for developers.

5:07: What verticals, i.e., autos, saw the biggest spending increases from the previous quarter, Justin Post from Merrill Lynch asks. Arora says autos was most-improved in the U.S., thanks to Cash for Clunkers, and retail gained from back-to-school sales. Finance “continues to be a tough vertical,” esp. when comparing to the year-earlier period. Some pockets, however, such as health insurance or insurance overall, are more positive.

5:09: “We’re really pleased about YouTube’s performance,” Pichette says. It’s “on its path to profitability in the not-too-distant future.” Google is monetizing more than 1 billion videos every week.

5:10: Arora adds that 90% of YouTube’s home-page inventory sold out in 3Q, “a tremendous improvement from prior quarters.”

5:13: Asked for a definition of “investing heavily in the future,” Schmidt says “it depends. You use your business judgment.” Google measures how products are doing and “starves” ones that aren’t growing. He notes that the company is “short key technical talent to achieve some of these broader initiatives.”

5:17: Arora declines to rank how countries fare in revenue contribution — “over time, all these markets are relevant for us.”

5:19: Pichette says mobile searches on Google grew 30% from 2Q. “It tells you something about the mobile space,” he says. “They’re just basically transforming how people live on a mobile basis…the ecosystem is incredibly vibrant right now.”

5:23: Arora says Google still sees consumers in emerging countries coming online, which creates more searches and generates more paid clicks world-wide. That’s in addition to work it’s doing to drive CPC growth.

5:26: Pichette, commenting on hiring outlook, says “it’s not about headcount…you have to find the right Googler.” Schmidt adds, “in terms of recruiting, I think we do it well. And so we will grow at whatever rate we can.”

5:28: Schmidt wraps up the call, saying, “I hope it’s clear that we’re very happy with the quarter. We believe we now have the confidence in our underlying business and the business trends to begin to get back to do the kinds of things that we really see as our mission, which is to make the world an information-rich place, to build some of these new businesses and really serve our customers very well.”


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