Google Earnings Set to Shine Despite Issues with China, Phones

All eyes are on Google (GOOG) Thursday as the U.S. Internet icon prepares to release its quarterly earnings report. Analysts expect another strong showing from the web search leader, which has demonstrated a remarkable ability to keep printing money during the recession.But no matter how sterling Google's results, all is not well at its Mountain View, Calif., headquarters. The company is currently locked in a dispute with China over cyber-security and censorship -- a row which seems to escalate by the day. Its first, much-heralded foray into mobile phones has fallen flat, and on Wednesday, word came that its two biggest rivals, Apple (AAPL) and Microsoft (MSFT), are plotting against it.

What's ironic about all the intrigue and uncertainty surrounding Google is that the company is poised to report excellent fourth quarter results. In particular, Google -- like eBay (EBAY) did Wednesday -- will likely say that it benefited from a stronger-than-expected holiday shopping season, which could propel the search giant to its first quarter of double-digit revenue growth in a year. Internet research firm comScore reported holiday sales were up 5% compared to last year.

Google's continued strength in the Web search market will also boost its showing. Google's search engine accounted for 65.7% of Americans' 14.7 billion searches in December, up from 65.6% in November, according to comScore.

Google Shrugs Off Recession

"Google has become a better-run, more disciplined company during the downturn and it remains well positioned to benefit from a still-developing advertising rebound," Barclays Capital analyst Douglas Anmuth wrote in a note to clients last week.

Showing that it had basically shrugged off the recession, Google's last earnings report three months ago handily topped Wall Street estimates, giving credence to its argument that it is better positioned than its rivals -- not to mention offline competitors -- to handle economic turmoil. Google shares more than doubled in value in 2009.

"We expect a strong quarter on both the top- and bottom-lines driven primarily by macro improvements, meaningful monetization improvements, currency, and a lag in new hiring and investment," Ben Schachter, Internet analyst at Broadpoint AM Tech wrote in a note to clients this week. "We are increasing our fourth quarter net revenue sequential growth estimate to 14% (from 12%), and our 4Q earnings-per-share estimate to $6.92."

Schachter is definitely on the bullish end of the spectrum. Google is expected to report fourth-quarter earnings of about $6.45, according to the averages of Wall Street polls conducted by FactSet Research and Thomson Reuters. UBS analyst Brian Pitz predicted Google would results "outperform" the market for the period, "amidst our theme of accelerating e-commerce and search growth in the fourth quarter."

Company Will Face Questions About China, Mobile Phones

While Google will no doubt report strong numbers for the last quarter, executives will face tough questioning on the challenges facing the company in this one. Most prominently, Google is currently locked in a widening dispute with China, after declaring it would no longer censor its Chinese-language search results in the wake of a massive cyber-attack that originated from China. Google said it is prepared to leave the country if talks with the Chinese government prove unproductive. Cyber-security firms have traced the source of the attack to agents connected to China's sprawling intelligence apparatus.

Analysts will also be interested to know why the company's recent launch of its mobile phone, the Nexus One, saw such lackluster sales and customer support problems. Finally, executives will be grilled about how they plan to respond to intensifying signs that Microsoft is teaming up with Google rivals -- Apple in mobile phones, Yahoo in web search -- to try to stifle the company's ambitions.

Meanwhile, analysts will no doubt want more information about the company's announcement this week that it would introduce a movie-rental service on its YouTube video website, beginning with five films from the 2009 and 2010 Sundance Film Festivals. The move is another experiment in Google ongoing quest to extract revenue from the wildly popular video site it bought for $1.65 billion in 2006. YouTube has become an international sensation, but it's still not an international money-maker.
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