Google’s Ad Business Booms Thanks To YouTube

Google officials wowed financial analysts on the company’s third-quarter earnings call by unveiling display and mobile ad statistics it usually keeps close to the vest.

Google for Q3 reported a 32-percent profit hike of $2.17billion (£1.4bn) on earnings per share of $6.72, up 32 percent from the $1.64bn on $5.13 per share tallied in Q3 2009. Google’s Q3 revenues totalled $7.29bn, up 23 percent from the same period a year ago.

The next multi-billion dollar business

These figures were aided by growth in Google’s display ad business, which is operating at an annualised run-rate of $2.5bn.

That’s counting YouTube ads, and all non-text ads running on Google’s network and DoubleClick networks, Jonathan Rosenberg, Google’s senior vice president of product management, said on the Q3 earnings call.

“You guys always ask me… where’s your next multi-billion dollar business after search,” Rosenberg said. “There’s your answer.”

YouTube is a particularly shiny star, with more than $2bn page views monetised each week, up 50 percent from a year ago. However, Google CFO Patrick Pichette declined to say whether YouTube was profitable.

Meanwhile, Google’s mobile ad business is running at a yearly run-rate of $1bn, with mobile searches on Android devices up 5 times from just two years ago.

The future of Internet search

This means people accessing products and services from smartphones are tacking $1bn onto Google’s revenue streams, Rosenberg stressed. “Clearly this is the future of search in the Internet,” he said.

What this means for analysts is that while search advertising remains Google’s core bread winner, businesses it has bet heavily on for the future – YouTube and Android – are beginning to pay off as the next multi-billion-businesses analysts have been searching for.

Caris and Co. analyst Sandeep Aggarwal said Google is now approaching a stage where non-core search business is becoming material enough to positively surprise Street for top-line and bottom-line.

Looking out the next three years, Aggarwal said in a 15 October research note that he expects search can deliver 15 to 16 percent compound annual growth rate, while non-core businesses, such as display and mobile advertising, will deliver a CAGR of 40 percent to 45 percent.

“We expect the non-core search business to be a source of incremental value creation at a more rapid pace, supported by a hockey stick type of mobile and display adoption, combined with operating leverage in mobile and YouTube, while a “disciplined and frugal” approach to growth should help margins,” he added.

Sustainable?

Gleacher and Co. analyst Yun Kim was a little less sanguine about Google’s display ad business in his 15 October research note, in which he noted:

“While we are beginning to see signs that its display business is growing fast enough and is big enough to offset a potential decline in its search business, we believe it is prudent to wait at least one more quarter to ensure that this growth can be sustainable.”

Still, there is no reason to think Google can’t sustain the growth. Rosenberg ad-libbed on the call that Google’s display and mobile ad businesses were still growing.