LIVE: Google Beats Q3 Earnings Expectations

Google beat third-quarter earnings expectations easily, posting a 7% rise in net revenues excluding payments to advertising partners, to $4.38 billion. Profit was $5.89 a share, handily beating forecasts.

Google had been expected to earn $5.40 a share on $4.23 billion in net revenues excluding payments to advertising partners, up from $4.92 a share on $4.04 billion in revenues a year ago.

“Google had a strong quarter — we saw 7% year-over-year revenue growth despite the tough economic conditions,” Google CEO Eric Schmidt said in a statement. “While there is a lot of uncertainty about the pace of economic recovery, we believe the worst of the recession is behind us and now feel confident about investing heavily in our future.”

Google’s dominance of search advertising, with upwards of 75% of search ad revenues, means its results may be unique. But its quarterly results confirm that the slow recovery Google executives have been reporting recently is starting to pick up. That may buoy hopes for a wider range of players dependent on online ads, from Yahoo to Microsoft to many Web startups.

Here’s the full release. Paid clicks, a key metric indicating the strength of the advertising business, rose 14% from a year ago. Cost per click, or the average amount advertisers on Google and its AdSense site partners paid, fell 6% from a year ago but rose 5% from the second quarter.

Free cash flow was $2.54 billion, meaning Google’s producing at least $10 billion in cash flow annually. Employee count fell again, by 121 people, to 19,665.

Already, investors had been anticipating that the search giant will at least meet and probably beat expectations. Indeed, signs of a recovery in search advertising have been building in recent days.

Google’s shares in after-hours trading were rising more than 3%. They had risen 67% so far this year, to an Oct. 14 close of $535.32, a new 52-week high. Just in the last month, shares are up 12% to the Nasdaq’s 3%. Shares were down about 1% for the Oct. 15 trading session, more than the Dow and the Nasdaq.

On the analyst call starting at 1:30 p.m. Pacific, investors will be looking for insight on several issues:

* the outlook for the fourth quarter and beyond, though Google doesn’t provide specific earnings forecasts.

* whether paid click growth and cost per click are showing any signs of improvement.

* information on profit margins, especially in coming quarters. Cost-cutting has kept them higher than expected in recent quarters, but CEO Eric Schmidt recently said Google would begin stepping up hiring again and would continue to make acquisitions.

* progress on YouTube, display ads, Android and mobile ads, and apps.

I’ll liveblog the highlights of the earnings call here, so check back starting at 1:30 p.m. Pacific. You can also listen to the Webcast yourself, as well as an additional Q&A call with more Google executives at 3 p.m. Pacific.

And the call begins:

On the call are Schmidt; Chief Financial Officer Patrick Pichette; Jonathan Rosenberg, senior vice president of product management; and Nikesh Arora, president of global sales operations and business development. They're using Google Moderator instead of live questions.

Here's Schmidt:

There's obviously a lot of uncertainty about the pace of economic recovery. But lots of signs of recovery. We now have the business confidence to invest in the next phase of innovation.

It's all good news... at least for our quarter.

We've proven the worth of this team. Huge opportunities ahead of us.

We're already stepping up our hiring.

70% of efforts are the core business. We're working to create much better ads. Many of our advertisers are looking for more ways to spend with Google if we can provide the products they want.

Android has come in a long way in a year. Now 12 devices in many countries, 32 carriers.

1 million publishers using AdSense network.

Enterprise business: Not only is our business accelerating, but ... strong feedback from large customers like Motorola and Genentech.

10% is new businesses: We're open for business in making strategic acquisitions both large and small.

We're very, very happy with Q3. The worst of the recession is clearly behind us.

Now Pichette goes over the details (the most important ones listed above, so I won't go into them here):

We believe the worst of the recession is behind us. And we feel confident investing in our innovation agenda.

Capital spending was $186 million.

We're disciplined but fully investing in long-term opportunities.

Now to Arora:

Our core business continues to drive our growth. Major push in U.S. to streamline ad operations and meeting with many major chief marketing officers.

Seeing renewed strength overseas. Spain strong, also China.

New YouTube partners, many of top 50 Ad Age advertisers.

Rosenberg's turn:

New AdWords user interface, biggest overhaul yet--lots of new reports, more efficient campaigns for advertisers. Also making a big investment push into new formats, such as local listing ads. Also launched new Maps data set last week. Huge investment, will allow new kinds of maps, say, different ones for locals and tourists. And Google Voice has features for local businesses. Everything is finally in place for local businesses to connects with customers online.

The display business is going very well. But still a highly inefficient business. DoubleClick exchange is intended to fix that.

And big bets on making Web better: new version of Chrome that's twice as fast.

And finally to questions:

Q: On ad business: Not much new in the answers to my ears.

Q: Impact of foreign exchange rates: Pichette: rather large impact. 8% difference in Euro. These numbers are material.

Q: Acquisitions--any strategic holes to fill? Mostly large or small? Schmidt: Historically have done about one small acquisition a month for specific technologies. Display ads, apps, parts of Chrome, Chrome OS, and Android platforms. We're certainly looking for larger businesses to buy, but it would have to be a significant strategic imperative, like large new customer base. But those will be relatively rare--maybe every year or two.

Q: What's behind recent Gmail outages? Rosenberg: not a function of underinvestment in servers etc.

Q: Why cap. ex. down so much? Pichette: Cap. ex. is lumpy. Have capacity ahead of needs. Good utilization. But clearly we are focused on innovation.

Schmidt: I would like us to be spending more in this area. ... been able to do very significant performance improvements. Also benefited from Moore's Law, multicore architectures.

Q: Seeing higher conversion rates? Arora: Won't get specific. But says conversion rates are holding up despite economy.

Q: Status of Android adoption and Chrome OS? Rosenberg: nothing specific. Will have more updates on Chrome OS later in the year. Schmidt: Android adoption is literally about to explode. This is a very, very critical period. Chrome OS: internal demos show it is a material achievement in cloud computing. Not quite done, hope a version out later this year. So roughly on time.

Q: Are stock buybacks being considered? Schmidt: We've been doing very well on the cash generation front. We love cash. The issue with the stock buybacks is historically they have not achieved the objectives set out. So not doing any anytime soon.

Q: What verticals like finance, autos, etc. doing? Arora: Autos best-performing in Q3 thanks to Cash for Clunkers. Finance still tough, though health insurance strong. Retail better thanks to back-to-school.

Q: Update on YouTube: Pichette: We're really pleased about YouTube performance. YouTube is on its path to profitability in the not-too-distant future. We're monetizing more than a billion videos a week. Arora: Sell home page ads across the world--90% of U.S. home page video sold out in Q3. Readying pre-roll inventory.

Q: Profit margins on other non-ad products: Schmidt: No margin target per se. We'll accept whatever their native margin structures are ... as long as we're winning in the marketplace.

Q: Color on acceleration in international business? Pichette: Seeing strength across markets.

Q: What mean by "investing heavily in the future"? Schmidt: We know when we've got a successful product because we measure it. Pretty straightforward business judgment. Would like to see increase in capital spending to pursue opportunities.

We are short key technical talent to achieve some of these broader initiatives.

Q: Mobile searches? Up 30% but no specifics on top of what base.

Q: Will expenses rise? Pichette: Google really has been a company that runs on its innovation agenda. Year ago, massive financial crisis, decided just to be prudent. Now the worst is behind us. It's important now to go back to what we really do well (innovate). We're really optimistic in making these investments.

Have to log off the call but to my ears, the questions are petering out into arcane details, repetition, and Google refusal to get specific. And now it's a wrap.

Before it's here, it's on the Bloomberg Terminal.