Majestic Research

BusinessWeek

Google Beats Third Quarter Profit Forecasts

By Rob Hof
Published: October 16, 2008

Google just reported third-quarter results, and it managed to defy skeptics who thought it might finally fall victim to the poor economy. Net revenues of $4.04 billion were dead-on with analysts’ estimates, and profits before special items was $4.92 a share, handily beating expectations.

Analysts had forecast $4.80 in earnings per share, minus special items such as stock option expenses, on net revenues of $4.05 billion after payments to partners that run Google ads on their sites. However, many analysts were informally assuming Google might come in slightly below their stated estimates and have been reducing estimates and price targets in recent weeks. A year ago, Google earned $3.92 a share on $4.23 billion in revenues.

In after-hours trading, Google’s stock, which closed up 4% today in a late rally, to $356.50 a share, was rising 10%, though that will likely vacillate after the earnings call. The stock had fallen 11% in the last three sessions for before today.

More from the release after the jump. And here’s CEO Eric Schmidt, which at the outset doesn’t indicate much about the future to my reading, except that he’s acknowledging the poor economy. However, he has done that before as well.

“We had a good third quarter with strong traffic and revenue growth across all of our major geographies thanks to the underlying strength of our core search and ads business. The measurability and ROI of search-based advertising remain key assets for Google. While we are realistic about the poor 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.”

Google third-quarter results are less important as a sign of the times than what’s coming next. And partly because Google doesn’t provide earnings guidance, analysts are somewhat pessimistic. “There’s a lot of doubt about whether the 2009 estimates are too high,” says John Aiken, managing director of Majestic Research. Currently, the consensus is for 23% growth, but Aiken thinks 20% is more likely, and even 15% is possible.

Although Google has been largely shielded from the downturn so far, the now nearly certain prospect of a protracted recession seems likely to affect even search advertising, especially since it is driven significantly by small and medium-sized businesses. Perhaps to an even greater extent than their larger brethren, they face dropping consumer demand and a scarcity of capital thanks to the credit crunch.

And even if they keep spending on search ads, it’s possible consumers who click on them will end up deciding to buy less often, which would make them less effective for advertisers. A third-quarter study from SearchIgnite this week, for instance, did find one trouble spot: Retailers in particular are starting to reduce their search ad spending, down 10% in September.

So Google’s third-quarter results aren’t nearly as important as the prospects for the fourth quarter and 2009. We’ll hear more about this from the earnings call, which starts shortly. I’ll add what I hear after the jump.