SAN FRANCISCO – Internet search leader Google Inc. (Nasdaq: GOOG) is scheduled to report its fourth-quarter earnings Thursday after the stock market closes.
WHAT TO WATCH FOR: With its share of lucrative Internet search market holding steady, Google should be one of the big winners from the strongest holiday shopping season since 2006. The company gets a piece of the action by bringing together shoppers and merchants through its search engine and the Internet’s largest advertising network. The growth in holiday spending was especially robust online, another factor pointing to a big quarter for Google.
Things went so well that Google decided in November to give its entire work force of 23,000 workers a 10 percent raise on top of their traditional after-tax holiday bonus of $1,000.
Google’s commitment to rewarding its employees and investing in long-term projects always make it difficult for investors to guess how much of the revenue pouring into the company will drop down to the bottom line. The company makes it even more difficult by refusing to provide financial guidance, although management made it clear throughout last year that Google intended to expand aggressively and spend heavily on acquisitions, equipment and technology.
Google followed through on that pledge during the first nine months of last year when it added nearly 3,500 workers and spent $1.6 billion buying 40 companies. The company’s capital expenditures almost tripled from the previous year to $1.5 billion during the period.
The companywide raise will increase Google’s operating expenses by about $500 million this year, assuming the number of employees rises by another 15 percent, according to RBC Capital Markets analyst Ross Sandler.
The number of new employees coming into Google would have been even greater if the company’s $6 billion offer to buy online coupon service Groupon hadn’t been rejected in early December. Groupon has more than 3,000 workers.
That rebuff wasn’t the only thing that didn’t work out the way Google wanted during the quarter. A Web-surfing system for high-definition TVs got off to a slow sales start, prompting Google to begin work on an upgrade designed to make the technology easier to use. Google also delayed the market debut of a computer operating system based on its Chrome Web browser until mid-2011, about six months behind its original target for getting the product into stores.
Google is facing another potential problem now that Verizon Communications Inc. has struck a deal to sell Apple Inc.’s iPhone. When AT&T Inc. had been the iPhone’s exclusive U.S. carrier during the past three years, Verizon threw its marketing weight behind phones operating with Google’s free Android operation system – technology that has helped Google reel in more ad revenue from mobile devices. A Google executive recently said about 300,000 Android-equipped devices are being activated per day. Now that marketing enthusiasm will be divided, as the iPhone is expected to bring Verizon a number of customers defecting from AT&T.
WHY IT MATTERS: Google provides a window into the Internet’s economic growth because so much money flows through its search-driven advertising network.
WHAT’S EXPECTED: Analysts polled by FactSet expect earnings of $8.06 per share, excluding expenses for employee stock compensation, on revenue of $6.06 billion, after subtracting Google’s ad commissions.
LAST YEAR’S QUARTER: In the fourth quarter of 2009, Google earned $2 billion, or $6.13 per share, on revenue of $6.7 billion.
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