How does the global recession affect Google?

Oct. 17 (Bloomberg) --

Google Inc., owner of the most popular Internet search engine, advanced in Nasdaq trading after reporting profit that topped analysts' estimates, saying customers are still buying Web ads even as the economy slows.

While advertisers of home and auto loans cut back, makers of apparel and appliances kept spending, Chief Financial Officer Patrick Pichette said. Consumers continue to shop online, he said, with clicks on ads climbing 18 percent, near the previous quarter's 19 percent growth.

The results, combined with better-than-anticipated reports from International Business Machines Corp. and Advanced Micro Devices Inc., cheered investors after a decline in technology shares this month. Google showed resilience in a weakening economy, said Mark May, an analyst at Needham & Co. in New York.

``This really shows we need to give them the benefit of the doubt,'' said May, who recommends buying the shares. ``They should be able to weather the storm fairly well.''

Google's third-quarter net income rose 26 percent to $1.35 billion, or $4.24 a share, from $1.07 billion, or $3.38, a year earlier. Leaving out costs such as stock-based compensation, profit was $4.92 a share, beating the $4.75 average estimate of analysts in a Bloomberg survey.

Google, based in Mountain View, California, rose $19.52, or 5.5 percent, to $372.54 on the Nasdaq Stock Market at 4 p.m. New York time, after earlier reaching $378.97. The shares have dropped 46 percent this year.

Advertising Shift

Advertisers are cutting back on TV and print media spending in favor of ads that run alongside search listings. The Internet will account for 8.7 percent of the $284 billion in U.S. ad spending this year, up from 7.2 percent in 2007, according to Barclays Capital.

Excluding revenue passed on to partner sites, Google's sales expanded to $4.04 billion last quarter. Total revenue climbed 31 percent to $5.54 billion.

At least eight analysts had reduced their estimates for Google's third quarter this month after the global credit crisis erupted. That made it easier for the company to beat the average profit estimates yesterday.

``This was exactly the kind of shot in the arm that investors need,'' said Jeff Lindsay, an analyst with Sanford C. Bernstein & Co. in New York. ``People lost a lot of faith in the Internet, but this is exactly what the doctor ordered.''

New Contracts

IBM, based in Armonk, New York, said yesterday it signed $12.7 billion in contracts last quarter, topping the estimate of as much as $11 billion from Cowen & Co. analyst Louis Miscioscia. Winning contracts with the Royal Dutch Navy and Bristol-Myers Squibb Co. boosted the total.

AMD reported a narrower third-quarter loss of $67 million, or 11 cents a share, compared with $396 million, or 71 cents, a year earlier as demand grew for graphics chips. The Sunnyvale, California-based company said revenue this quarter will probably be little changed from the previous period.

AMD rose 36 cents, or 8.7 percent, to $4.48 on the New York Stock Exchange. IBM dropped 58 cents to $90.94 after gaining yesterday in late trading.

``Tech is going to continue to be challenged for a period of time,'' Miscioscia, who has a neutral rating on IBM shares, said in an interview. ``To put this in perspective, IBM is up $2 after market, not $10, after falling about $20 since Oct. 1.''

Google handled 63 percent of U.S. online searches in August, double the market share of Yahoo! Inc. and Microsoft Corp. combined. That dominance has helped the company command higher prices for ads, according to Yahoo, which is awaiting government approval of an agreement to let Google sell some ads on its sites.

Cutting Back

Still, Google has reduced expenses by slowing its hiring rate and spending less on travel and events, said co-founder Sergey Brin.

``We don't know exactly what the future holds. We've taken a conservative approach,'' Brin said in an interview. ``We view this as an opportunity to refine our company and sharpen it.''

Capital expenditures fell to $452 million, down 18 percent from a year earlier, as Google made more efficient use of its computing centers, Brin said. He said he couldn't forecast whether the costs would continue to fall.

The credit crisis may cost the Internet ad market $6.7 billion in lost sales through 2010, according to Collins Stewart Plc. Big and small businesses, from General Motors Corp. to Simplexity LLC, are reducing ad spending plans, while some financial companies, such as Wachovia Corp., have disappeared.

Slower Growth?

The reductions will push down growth in U.S. Internet ad spending to less than 20 percent next year for the first time since 2002, said Sandeep Aggarwal, a Collins Stewart analyst in San Francisco. Advertisers will scale back spending on newspapers and broadcast TV networks, his firm said this month.

``Advertisers stay with the Internet because it's the way to reach the key younger demographic and that's what advertisers are really after,'' Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC, said in an interview from Bedford Hills, New York.

Google, which gets almost all its revenue from Internet searches, is developing ways to advertise with images and video. The company struck a deal this month to show full-length programs from CBS Corp. on its YouTube site, splitting ad revenue with the network.

``The economic situation is so fluid that we're all sort of in uncharted territory,'' Chief Executive Officer Eric Schmidt said yesterday on a conference call. ``We've always been in this for the long term, and we believe that's even more important today than ever.''

To contact the reporters on this story: Crayton Harrison in Dallas at tharrison5@bloomberg.net; Lauren Berry in New York at lberry4@bloomberg.net

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