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Google’s Income Rises 32%, Topping Forecast

By CLAIRE CAIN MILLER

Published: October 14, 2010

SAN FRANCISCO — Google has spent the last few months arguing to anyone who will listen that its new advertising businesses — including ads with images and video and on cellphones — will fuel its next phase of growth. On Thursday, the company finally gave some numbers to support the claim.

Search advertising revenue still drove Google’s better-than-expected performance in the third quarter, when revenue climbed 23 percent and net income rose 32 percent. But for the first time Google said on a call with analysts, display ads — nontext ads with images and video on YouTube and other Web sites — are on track to generate more than $2.5 billion in revenue in the coming year, while mobile ads are on track to contribute another $1 billion.

“Where’s the next multibillion-dollar business after search?” said Jonathan Rosenberg, senior vice president of product management at Google, on the call. “There’s your answer. It’s display and it’s already here.” About mobile, he said, “Clearly this is the future of search and the Internet.”

Still, $3.5 billion in revenue from the new types of advertising is a small piece of the $30 billion in annual revenue expected from Google, and not yet big enough to significantly affect its financial results, said Jordan Rohan, a managing director for Internet and digital media research at Stifel Nicolaus. That will probably not change until about 2012, he said.

“What matters is how much longer can Google grow at 20 percent or more, which is considered rapid growth, double the rate of Internet advertising at this point,” Mr. Rohan said. If the company can continue to grow at that rate, he said, “it would suggest that they’ve extended gracefully into display and mobile.”

Google said net income in the quarter ending Sept. 30 rose to $2.17 billion, or $6.72 cents a share, from $1.64 billion, or $5.13 a share, in the year-ago quarter. Excluding the cost of stock options and the related tax benefits, Google’s third-quarter profit was $7.64 a share. The company said revenue climbed to $7.29 billion, from $5.94 billion. Net revenue, which excludes commissions paid to advertising partners, was $5.48 billion, up from $4.38 billion a year ago.

The results beat the expectations of Wall Street analysts, and Google’s stock price rose about 9 percent in after-hours trading.

Because Google’s search revenue is so large, it needs to go after even bigger ad businesses to move the needle, said Colin W. Gillis, a technology analyst at BGC Partners.

“The next big pool of dollars are the brand dollars, the television dollars, and Google is starting to chase after that, but very slowly,” Mr. Gillis said. “Television’s ripe for disrupting as people are fast-forwarding through TV ads.”

This month, Google introduced Google TV, which lets people access the Web on their television screens. Though it does not yet include advertising, it could eventually help Google get some of the $50 billion television advertising market, Mr. Gillis said.

The percentage of revenue that the new ad businesses account for is less important than what Google can now offer advertisers, Susan Wojcicki, a vice president of product management at Google who is responsible for ad products, said in an interview.

“If you’re an advertiser, you can do display, mobile and search with Google,” she said.

Google said paid clicks on ads on Google sites and other sites that run Google ads grew 16 percent compared with the same period a year ago and 4 percent compared with the second quarter.

Mr. Rosenberg said Google Instant, the search tool that the company introduced in September to predict search queries and adjust the results as people type, had had minimal effect on Google’s revenue. Some analysts predicted that it would increase clicks on the more expensive ads that appear alongside the most common search queries, since people no longer necessarily finish typing their full query.

Google has recently been rapidly investing in other areas, which weighs on its profit margins and “causes some investors to wince,” Mr. Gillis said.

But on Thursday, the company’s executives made it clear that they intended to maintain the same level of investment in both employees and new products.

“Simply put, we’re on this growth agenda at full throttle,” said Patrick Pichette, Google’s chief financial officer.

Google hired 1,526 people in the quarter, which included the postgraduation hiring months, bringing the total number of employees to 23,331.

Google has also been investing in its new businesses that are not yet generating revenue. These include its Android mobile phones, Chrome browser and operating system and its social networking efforts, meant to head off competition from Facebook. They also include some more surprising businesses, like robotic cars that do not need drivers and wind energy farms in the Atlantic Ocean.