Behind Google's Glowing Earnings

Even as the economy skids, Google (GOOG) keeps on rolling—just a little more slowly than it used to. Bucking the stalling economy and worsening outlook for online advertising, the search advertising titan on Jan. 22 reported better-than-expected fourth-quarter results. The numbers suggest Google will keep grabbing more of the online ad market from traditional media and from struggling online rivals such as Yahoo! (YHOO) and Microsoft (MSFT).

Shares of Google, which fell 56% last year, slipped almost 3% in extended trading after an initial 4% gain. Enthusiasm for the company's fourth-quarter results was muted by questions about whether Google can keep posting solid gains as advertisers rein in spending. Investors also appeared to balk at an employee stock option exchange that will cost Google $460 million. Before the closing bell, the stock had climbed 1% to 306.50.

Google, which gets paid each time someone clicks on text ads placed on search results pages, had earnings of $5.10 a share, excluding some one-time expenses and stock option costs. That was up from $4.92 a year earlier. Net income, however, fell 68% to $382 million, thanks mainly to those charges, which include $1.1 billion in noncash charges to reflect the declining value of Google's stakes in Time Warner's (TWX) AOL unit and the wireless service provider Clearwire (CLWR).

Good Numbers in Bad Times

Sales rose 18%, to $5.7 billion, a considerable slowing of growth from previous quarters but still seen as positive in the current economy. "It was a very good quarter at a time when [Wall] Street was starting to penalize the company for the economy," says Sandeep Aggarwal, an analyst with financial-services firm Collins Stewart. After subtracting commissions paid to partners for sending traffic to Google, sales rose 21%, to $4.22 billion, about $100 million more than analysts expected.

Coming in a quarter when the economy's troubles deepened considerably, the results encouraged analysts who had been lowering their expectations about Google's performance. "The performance was really very impressive," says Jeffrey Lindsay, an analyst with Sanford C. Bernstein. "If they could do this well [during a tough quarter], this is pretty much how they'll perform through 2009."

Google's results indicate that search advertising, while not immune to the economy, continues to look more attractive to marketers than other kinds of ads.

Researcher eMarketer estimates spending on search advertising will rise 15%, to $12.3 billion, this year, while spending on display ads will rise 7%, to $4.9 billion—though many analysts think display won't even do that well. Search ads generally catch people when they're close to a purchase, and their clicks and purchases can be measured more precisely than with other kinds of ads. "Paid search is every bit as robust as people theorized it might be," Lindsay says. "It's the platform advertisers will hang on to [till] the bitter end."