Google and IBM Post Strong Earnings as the Tech Sector Heats Up

Andrew Kelly / REUTERS The Google signage is seen at the company's headquarters in New York January 8, 2013. Google and a New York redevelopment organisation are providing a Manhattan neighbourhood with free public WiFi Internet access, making it the largest area of coverage in New York City.

Technology titans Google and IBM delivered surprisingly strong earnings results Tuesday, in a positive sign for the tech sector following several quarters of lackluster performance across the industry. Google showed progress addressing one of its key challenges: the steady migration of users to mobile search, which generates less ad revenue for the company than desktop search.

Google reported strong revenue growth, in a sign that the overall online advertising market keeps growing, as marketers continue their seemingly inexorable shift away from traditional ad platforms — including print — and toward Internet advertising. Google shares soared 5% after the results were announced.

IBM reported record profits, driven by the company’s ongoing, decade-long transition toward software and services, as net income increased by 6%. IBM’s results were propelled by what CEO Ginni Rometty called “higher-value businesses,” including cloud computing and data analytics. Because of IBM’s vast reach across the technology world, as well as its global footprint, the company is a closely watched bellwether for the overall health of the tech sector, and its results augur well for other companies, including Apple, which reports its results Wednesday. IBM shares jumped 4.3% after the results were announced.

“Our performance in the fourth quarter and for the full year was driven by our strategic growth initiatives — growth markets, analytics, cloud computing, Smarter Planet solutions — which support our continued shift to higher-value businesses,” Rometty said in a statement.

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Google said that its net income increased 13% on revenue of $14.42 billion, a 36% increase over one year ago. “Overall it was a solid quarter for Google with the advertising business seeing healthy gains,” Jeffries & Company analyst Brian Pitz said in a note to clients.

In a conference call with analysts, Google CEO Larry Page touted the fact that Google hit $50 billion in revenues for the first time last year. “Not a bad achievement in just a decade and a half,” Page said. “In today’s multi-screen world we face tremendous opportunities as a technology company focused on user benefit.” Over the last year, Page has suffered from an undisclosed voice ailment, and he sounded hoarse and strained on the call, as he has during his last several public appearances.

Wall Street analysts have been intensely focused on Google’s “cost per click,” which is the price marketers pay to advertise on the company’s platform. As users shift from desktop computing to mobile computing, Google’s cost per click has declined, because marketers tend to pay less for ads on the company’s mobile search platform, compared to its desktop search platform. Thus far, marketers have seen less value in mobile advertising, in part because the smaller screen has less room to display ads.

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Google’s cost per click increased 2% over last quarter, and although it declined 6% from one year ago, that was still better than the 7.5% decline that analysts were expecting. This better-than-expected performance was a key driver of the company’s after-hours stock jump.

“As the business continues to shift toward mobile and advertisers think holistically about clicks rather than about which devices they’re coming from, we think the Street will as well, and that bodes well for Google,” JPMorgan analyst Doug Anmuth wrote in a note to clients. “Google remains well-positioned for the shift to mobile over time given an advertising format that ports well to mobile, Android’s strong share, and largely untapped local opportunities.”

During the conference call, Page downplayed concerns about mobile revenue, asserting that the user experience on desktop computers, tablets, and smartphones, is beginning to converge. “People carry a supercomputer in their pocket all the time,” Page said. “The experiences are improving a lot, and very, very quickly,” he said, adding that he finds the latest smartphones “almost like using a desktop last year. I think the CPCs will improve as the devices improve.”

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Page also spoke about the company’s experimental projects, which are being developed in the top-secret Google X research lab, including self-driving cars, and Google Glass wearable computing, which is a top priority for Google co-founder Sergey Brin. (Last weekend, Brin was spotted on the New York City subway wearing the high-tech glasses.)

Although some investors have grumbled about Google’s efforts in these areas, the company certainly has the necessary financial cushion — $48.1 billion in cash and marketable securities — to pursue these initiatives. Google will continue to pursue these grand challenges, Page said. “I know it sounds funny, but with the ambitious plans we have, we are only just getting started,” Page said.

Taken together, the strong results posted by Google and IBM are good signs heading into the middle of tech earnings season. Because Google and IBM are bellwethers in different businesses — online advertising (Google), and software and services (IBM) — their solid performances point to an increasingly positive picture for the overall technology market. On Wednesday, all eyes will be on hardware tech juggernaut Apple, which is expected to report record results, following a blockbuster holiday quarter.

Sam Gustin is a reporter at TIME focused on business, technology, and public policy. A native of New York City, he graduated from Reed College and Columbia University's Graduate School of Journalism.