Google Internet business defies econ worries, ad clicks surge

Google Inc’s core Internet business increased revenue by 21 percent in the second quarter, easing Wall Street worries that a slumping global economy would take a toll on the company’s online advertising.

Shares of the world’s No.1 search engine were up about 3 percent in after hours trade.

Google, which reported its first set of quarterly results since its May acquisition of Motorola Mobility for $12.5 billion, offered few details about its plans to expand into the hardware business, focusing instead on what it described as healthy trends in its traditional online advertising business.

“The stock is working after hours because core search seems to be working really well,” said ThinkEquity analyst Ronald Josey.

“I don’t think it was a knock-the-cover-off-the-ball quarter, but a quarter that showed that despite the fears around macro and FX, the company continues to execute really well,” said Josey.

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Google’s advertising rates continued to be pressured by adverse macroeconomic and currency conditions and by consumers’ increasing use of smartphones to access mobile versions of the Web. But investors took comfort in the 42 percent surge in overall clicks on Google’s search ads during the second quarter. “Paid-click volume is really strong; it’s a good thing. The volumes are accelerating and usage of Google has not stopped, it has just continued,” said Susquehanna Financial analyst Herman Leung.

Google said revenue for its existing Internet business totaled $10.96 billion in the quarter, up from $9 billion a year earlier. Google Finance Chief Patrick Pichette said the company was still in the process of evaluating every business and division of Motorola.

Doing well on the business front

“I need a bit of patience for us to complete our homework,” Pichette said, when asked about Google’s views on Motorola’s television set-top box business.

Investors have a wide range of questions about Google’s expansion into the hardware business, where margins are low and competition with the likes of Apple Inc and Samsung Electronics is fierce.

“We, like everyone else, were expecting to get a little more around what they were expecting to do with it, rather than just noting that it’s only a couple of months in,” said RBC Capital Markets analyst Andre Sequin, referring to Google’s plans for Motorola two months after the deal officially closed.

Among the key questions still unanswered by Google, he said, are the pace at which the company will churn out new mobile phones and whether Google will develop a high-end device that’s intended to challenge Apple’s iPhone directly.

“For most people, the biggest concern is that this is not a core competency for them. And what will this do to margins?” said Sequin.

Motorola reported an operating loss of $233 million in the second quarter on revenue of $1.25 billion.

With little information to share on Motorola, Google executives went to lengths on the conference call to highlight the success of past acquisitions. Senior Vice President Nikesh Arora ticked off several past deals, including Youtube and Doubleclick, which he said were now “well integrated and helping us succeed in the ad space”.

Chief Executive Larry Page, who is resting his voice due to an unspecified ailment, did not participate in the call. Arora said that Page continues to run the company but that there was no news to share on his health.

Google’s stock climbed to $611 in extended trade, from a close of $593.06 on the Nasdaq.

Google’s headcount swelled to 54,604 employees at the end of the second quarter due to the Motorola acquisition, which added roughly 20,000 workers to the Internet company’s payroll.

Google said its mobile advertising efforts continued to make progress. More than 1 million of its advertisers now have access to its AdMob mobile advertising features, it said.

The cost per click for Google’s online search ads continued to decline in the second quarter, falling 16 percent year-on-year. But some analysts highlighted a quarter-on-quarter 1 percent gain in second quarter CPCs.

“(Cost per click) was down more than I expected, but this could be a trough, since we did see a sequential uptick,” said Needham & Co analyst Kerry Rice. “We may have hit the bottom here.”

Google posted overall revenue of $12.2 billion for the quarter and net income of $2.79 billion, or $8.42 per share, on a consolidated basis.

“Search demand in the U.S. was pretty solid, and despite economic challenges in Europe, I’m getting the sense that search demand was not too bad there,” said Rice.

Reuters