Google Capital Spending Spree Will Continue After Strong 3Q Earnings

Flush with cash, Google will continue its capital spending spree on new data centers and networks, but curb its hiring going forward, according to the company.

Google reported $553 million in capital spending in the third quarter ended Sept. 30, but more than made up for its spending in profits during the third quarter ended Sept. 30.

The company earned $1.07 billion, or $3.38 per diluted share, on $4.23 billion in revenue. Earnings increased 46 percent from $733.3 million, or $2.36 per share, in the year ago quarter, while sales increased 57 percent, from $2.69 billion, for the same period. Earnings per share before one-time costs were $3.91. Analysts were expecting an average of $3.78 per share excluding costs.

The majority of its capital spending was related to IT infrastructure investments, including data centers, servers, and networking equipment, according to the company, spending that will continue in future quarters.

Shares of Google closed at $639.62 on Thursday, up $6.14 per share or 1 percent.

Eric Schmidt, CEO of Google, said the company's core search advertising business experienced continued momentum driven by growth in monetization and traffic. "Our efforts to offer more products and services in international markets as well as effectively grow our technology infrastructure and add to our deep talent base during the quarter helped to deliver growth by enabling Google to reach more users around the world," he said in a statement.

Advertising from Google's Web sites increased 68 percent to $2.73 billion from $1.63 billion. Advertising from Google Network Web sites increased 40 percent to $1.45 billion from $1.04 billion. Licensing and other revenue accounted for $41.9 million, up from $26.7 million.

Google continues to innovate its advertising models, including some initial success with video ads, said Sergey Brin, Google's president of technology, on the analysts' call.

Instead of playing an ad before watching a video, Google overlays the ad in the bottom 20 percent of the screen for a few seconds after the user's requested video starts playing, Brin said.

"Our user feedback has been positive. We've had better click-through rates than we anticipated. We're optimistic. This is the kind of thing we have to do. We have to experiment with different kinds of things," he said on the call.

Google added 2,130 employees in the quarter and now has 15,916 employees, according to the company. It plans to temper hiring going forward to help control cost increases, Schmidt told analysts.

On the conference call, Larry Page, president of products at Google, touched on the company's reported interest in the government's auction of some 700 Mhz bandwidth in order to pursue a mobile strategy. Google reportedly asked the government to change some of its auction rules to favor the company but was denied. "We've been quite happy with the openness provision put into the 700 Mhz auction," Page said. "We have many different options available to us in terms of spectrucm and connectivity and wireless. I don't think we feel there's any desperate need for us to have to bid to win. Money is not burning a hole in our pockets."

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