Earnings preview: High hopes riding on Google's 3Q

Google's 3Q results expected to show Internet search leader's ad sales are accelerating again

• By Michael Liedtke, AP Technology Writer
• On 9:07 am EDT, Tuesday October 13, 2009

SAN FRANCISCO (AP) -- Internet search leader Google Inc. is scheduled to report its third-quarter results after the stock market closes Thursday. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: Coming off the first rough patch in its five-year history as a public company, Google appears to be regaining the luster that propelled its stock price to nearly $750 in 2007 before falling below $250 late last year. The shares hit a new 52-week high of $525.76 in Monday's trading.

And many analysts are predicting Google's stock will climb even higher during the next year. The positive outlook is based largely on the premise that the Mountain View, Calif.-based company will be among the first major beneficiaries of a recovery in the depressed ad market.

Although it has expanded into computer-software applications and telecommunications, Google still makes most of its money from online ads that are tied to search requests and other content on Web pages.

The weakening dollar also is expected to boost Google's earnings because more than half of its revenue comes from outside the United States.

Eric Schmidt, Google's CEO, has done little to discourage the optimism with public comment indicating that he believes advertisers are ready to increase their spending on his company's marketing network -- the largest and most lucrative on the Internet.

Unlike other many other ad-dependent businesses, Google still prospered during the recession and even eked out modest revenue growth. Still, the single-digit gains in revenue were a sobering comedown for a company that hadn't generated a quarterly revenue increase below 30 percent until the end of last year.

The slowdown prompted Google to spend less money on computer gear and employee perquisites to boost its profits. The company became so frugal that it even pared its payroll for the first time in the second quarter.

In a telling sign that he believes the company has reached a turning point, Schmidt told reporters earlier this month that Google will likely ramp up its hiring efforts again. Google ended June with just under 20,000 workers, up from about 2,300 employees when it went public in August 2004.

Google's fortunes appear to be rising even as rival Microsoft Corp. ramp ups its efforts to lure search traffic -- and advertising budgets -- away from Google.

Microsoft renamed its search engine Bing in June as part of an upgrade that has been heavily promoted in a $100 million marketing campaign. So far though, Google remains way out in front with a nearly two-thirds share of the U.S. search market compared with about 10 percent for Microsoft.

In an even bigger potential threat, Microsoft finally struck a deal to team up with Yahoo Inc., which runs the Internet's second largest search engine with a U.S. market share just under 20 percent. If the alliance wins regulators' approval, Microsoft's technology would process the search requests and steer the search advertising on Yahoo's Web site in the United States.

Meanwhile, Google is striking back at Microsoft by developing a computer-operating system to compete against dominant Windows in the consumer market.

BY THE NUMBERS: Analysts surveyed by Thomson Reuters expect Google to earn $5.40 per share on revenue of $4.23 billion. The estimates exclude Google's expenses for employee-stock compensation, unusual charges and the revenue that the company pays its advertising partners.

ANALYST TAKE: Broadpoint AmTech analyst Benjamin Schachter thinks Google's third quarter turned out a lot better than management envisioned at the beginning of the year when the global economy was stuck in deep rut. While the rebound is good news, Schachter suspects the third-quarter gains in ad sales may require Google to set aside more money for employee bonuses than investors have been anticipating. If that happens, it could take a bigger bite of Google's profits for the period, Schachter wrote in a research note this week.

WHAT'S AHEAD: Google seems intent on getting more revenue out of its two biggest acquisitions, the video-sharing site YouTube and the ad service, DoubleClick Inc.

YouTube has been unprofitable since Google bought it for $1.76 billion three years ago, but Google executives have indicated the site is getting close to making money as YouTube strikes more deals to show clips from TV shows, music videos and movies.

Hoping to make DoubleClick's system for selling online billboards and other graphical ads more effective, Google last month unveiled a marketing exchange powered by some of the same technology that has made its search-advertising network so profitable. Google bought DoubleClick for $3.2 billion last year.

STOCK PERFORMANCE: Google shares rose 18 percent in the third quarter.

Buzz up!