Google's online-ad and Android sales outperform Wall Street expectations

Google's 3Q report proved Wall Street wrong in their below average expectations for Android and online-ad sales.

Lucy Nicholson/Reuters
Surfboards lean against a wall at the Google office in Santa Monica, California. Google blew past Wall Street's quarterly profit and revenue expectations as a 25-percent revenue surge offset rising expenses, sending its shares up 9 percent.

Google Inc.'s third-quarter earnings demonstrated that the Internet search leader is capable of surpassing investors' short-term expectations while still investing heavily in long-range projects.

Google reported a 32 percent jump in net income Thursday and provided the most persuasive evidence yet that its past investments are paying off, helping it diversify away from search advertising.

Wall Street was encouraged, and sent Google's shares soaring 9 percent to $590.01 in extended trading after the release of results.

IN PICTURES: Google's doodles

Text links placed above or alongside search results are still Google's main source of revenue, but the company has laid out billions to beef up its ability to sell image-based "display" ads, ads inside Web videos and on mobile phones. The company paid $3.2 billion for DoubleClick, a display ad network, and $681 million for mobile-ad firm AdMob.

Executives indicated Thursday that display advertising accounted for nearly 10 percent of ad revenue in the quarter, and mobile advertising was almost 4 percent.

Both businesses are doing better than expected, said analyst Clayton Moran of The Benchmark Co.

Those successes could help calm investors worried about Google's insistence on spending more despite ongoing pessimism about the economy. The Web search leader added 1,500 workers in the quarter, for a total of 3,500 new employees so far this year. Capital expenditures — what Google pays for data centers, servers and networking equipment to keep its growing number of Web services online — increased more than fourfold to $757 million from $186 million a year earlier.

"That obviously could be a concern for investors, but when you look at the performance of the business, the conclusion is that the investment's worth it," Moran said.

Google is known for making long-shot investments. This week, some of its oddest projects yet came to light: It's dabbling in wind farms and computer-driven cars.

During a conference call with analysts, Google Chief Financial Officer Patrick Pichette left no doubt that such investments would continue, saying, "We're on this growth agenda at full throttle."

For July through September, Google's net income rose to $2.2 billion, or $6.72 per share, from $1.6 billion, or $5.13 per share, a year earlier.

Excluding certain expenses, Google earned $7.64 a share, topping the $6.69 a share analysts expected.

Google's tax rate was lower than usual in the quarter, which helped boost net income. But even without that boon, earnings would have beat expectations, Moran said.

Revenue rose 23 percent to $7.3 billion from $5.9 billion a year earlier. After subtracting commissions paid to its ad partners, Google's revenue stood at $5.5 billion, about $200 million more than analysts predicted, according to a Thomson Reuters survey.

The company ended the quarter with about $33.4 billion in cash and marketable securities.

Google, which is based in Mountain View, California, said its average cost per click rose 3 percent from a year ago, meaning companies paid more to place ads. People clicked on ads 16 percent more than they did in the same period last year.

During a conference call with analysts, Google said sales of its display ads, which include those on YouTube, are on a pace that would translate to $2.5 billion annually. Its mobile advertising businesses are on pace to bring in $1 billion in revenue annually. The figures are the most specific Google has released about the two emerging businesses.

Before the release of results, its shares lost $2.37 to close at $540.93.

IN PICTURES: Google's doodles

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