Google’s golden one-trick pony

October 16, 2009

Google chief executive Eric Schmidt declared “the worst of the recession is over” while unveiling third quarter results. Certainly Google’s recession doesn’t look like anyone else’s.

Revenues of $5.945 billion were up 7 percent from a year ago  and up 8 percent over the previous quarter, after  two flat quarters. Earnings of $5.89 per share were comfortably ahead of the consensus estimate of $5.32. Cost per click, the average amount advertisers pay, was up 5 percent from the second quarter, although still down on the previous year. And Google gushes money — the third quarter had $2.5 billion in free cash flow.

There are, however, factors that give pause. Part of Google’s strong recovery came from discipline. Capital expenditure was way down ($186 million compared with $452 million year on year), contractors in the workforce were largely eliminated, staff numbers were cut, and even the famed free food at the Googleplex was trimmed. Schmidt suggested that some of those constraints will be loosened. Capital expenditure will rise — the third quarter was already ahead of the second — and Google is hiring again.

Schmidt also talked about making strategic acquisitions, although these are likely to be small. When Google was growing by double figures each quarter, discipline was an afterthought. The company has shown it can clamp down, but there is some risk that it will return to previous profligacy.

Given the global downturn in advertising, which still accounts for the vast bulk of Google’s revenues, the results count as stunning. They were only 10 percent ahead of estimates, but estimates had been boosted in recent weeks by a stream of bullish comments from Google executives. During the darkest days of the recession, Schmidt insisted that search advertising would prove more robust than other forms, and he has been proven right.

There are also signs that Google may be finding ways to make money on drains like YouTube. On the earnings call, CFO Patrick Pichette said that Google is monetizing more than 1 billion videos views each week (YouTube streams more than 1 billion videos each day).

Ideas continue to stream out of the Googleplex, from clever phone service Google Voice to the over-hyped Google Wave. There’s also Android, Google’s mobile phone operating system. Schmidt said that “Android adoption is about to explode.” We’ll see. Most, however, don’t move the needle in Google’s multibillion revenues.

There are certainly challenges, notably the migration to mobile search (up 30 percent on the quarter) and the lure of real-time search. But the main show provides plenty of room for experiment and evolution.

Search advertising may be a one-trick pony for Google, but what a trick.

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