Google’s Core Search and Advertising Businesses Healthy in Q3. What’s Next?

Google has reported its Q3 revenues today and the industry seems to have exhaled in relief. Yesterday we heard lots of talks that if Google reported anything even remotely negative, the entire web industry would be significantly hurt as everyone would start questioning reliability of ad-supported business model. But fortunately for the industry, Google seems to be healthier than experts predicted.

For the third quarter Google reported revenues of $5.54 billion - 31% growth year on year. It is also an increase of 3% compared to the previous quarter of 2008. Net income was over $1.5 billion.

When it comes to revenue sources for Google, Google’s own sites are of higher importance to the search giant as they generated $3.67 billion, or 67% of the total revenue while Google AdSense publishing partners accounted for $1.68 billion, or 30% of total revenues. Google paid $1.33 billion to its publishers in the third quarter. I believe Om Malik has all reasons to suggest Google’s publishing partners should be worried watching Google getting less dependent on our traffic and promoting its own properties further.

It is maybe even more important that the number of paid clicks in general still grows: in the third quarter it was 18% higher than at the same period of 2007 and 4% higher than in Q2 2008. Probably this is partly due to Google trying to improve how they rate landing pages for ads so that people know they would arrive to some useful sites when clicking ads - thus clicking them even more. But I think it will be safe to say that Google is also improving relevance of ads same as publishers optimize where they place Google ads on the websites so that visitors were more inclined to click.

Google also expects to continue making significant capital expenditures (in Q3 the corporation spent $452 million, mainly on IT infrastructure like data centers, servers, and networking equipment) which must be a good indication of the fact that at least server suppliers for Google will have a revenue source during the economic meltdown. I have to mention that this figure is actually 18% lower than for the same period last year due to costs reduction in place seeking to keep the corporation healthy but it is still substantial enough.

It is no wonder that after a healthy report that beat analysts’ expectations Google’s shares climbed almost 15% in after-hours trading. And I have no doubts that we’ll see substantial growth when NASDAQ opens in the morning tomorrow.

Eric Schmidt has actually admitted that the state of the world economy is poor but insisted that the main assets for Google are the measurability of ROI of its search-based advertising. This is something we have been talking about for a while here already: as the economy shrinks advertisers will think about results, not about the eyeballs - and here is where Google Adwords model looks like one of the most advantageous in terms of ROI. Besides, the shrinking personal budgets will drive more people to Google in search for bargains - both using search services and clicking ads as well.

For the time being Google behaves exactly as we think showing that it will be safe - recession or no recession - with its solid combination of services, huge traffic and benefits it can offer to advertisers seeking to optimize their marketing expenses. We’ll have to see if this trend will continue but for now Google looks like it is prepared to survive the crisis.