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Call it a comeback? Google earnings due

Google's third-quarter earnings will arrive Thursday as optimism builds that the Internet advertising economy has turned the corner after a devastating year.

With the online ad business appearing to have collected itself at the bottom of the ravine, all eyes will be on Google's earnings report Thursday to see if it has figured out where the path back to the top starts.

Investors are feeling good about Google in the run-up to Thursday's third-quarter earnings conference call, sending the stock to a 52-week high on Tuesday at $527.46 before it settled back down to $526.11 at the close of trading. Five prominent financial analysts raised their expectations for Google's stock Monday amid a collective feeling that advertisers have started to finally increase their spending after sitting on their wallets for about a year.

Last week Google CEO Eric Schmidt said that not only are things picking up in the U.S., but Europe has started to get its groove back ahead of the expected timeline. Google sales representatives gathered in New York last week were said to be "very, very positive."

As a whole, the financial community is expecting Google to record $4.23 billion in net revenue--gross revenue minus traffic acquisition costs paid to Google partners--and earnings per share of $5.39 for the period that ended in September. That would imply a revenue increase of 4 percent compared to last year, a far cry from the numbers Google used to put up but in line with its recessionary performance.

Sentiment is growing, however, that those expectations could be conservative coming off a rough year. Both Goldman Sachs and UBS cited increased activity from advertisers in raising their price targets on Google's stock Monday, to $585 and $580, respectively, according to Tech Trader Daily. Goldman said that advertising spending has increased in certain areas, such as travel and clothing, and UBS thinks Google is getting better pricing on clicks as demand once again stirs for search keywords.

Google certainly hasn't lost much steam in its core market. Its share of the U.S. search market remained relatively flat at about 64 percent of the market over the period in question, according to ComScore. Despite a huge marketing push from Microsoft around the launch of Bing, most of Microsoft's gains seem to have come at the expense of its proposed partner--Yahoo--as well as the also-rans of the search market.

The other good thing for Google is that even if search growth in the U.S. continues to creep along--up just 3 percent from July to August--the worldwide growth in search queries is quite strong, giving the company some room to grow revenue. Revenue from outside the U.S. made up 53 percent of the company's second-quarter revenue, although competition is tougher for Google outside its home country, especially in fast-growing China.

Citigroup's Mark Mahaney, speaking to MarketWatch earlier this week, described search advertising as one of the more resilient forms of advertising during a slump, and as such is also one of the first places where companies will want to put their money as budgets loosen. That means Google's results--if the optimists win the day--will be held up as the start of the online advertising recovery as well as a sign that the rest of the industry still has a ways to go.

Longer term, however, Google needs to make something else pay off beyond its search juggernaut if it wants to sustain long-term growth, Mahaney said. Google has made some progress in the last quarter on some of those areas, launching a revamped display ad exchange (although that came too late in the quarter to have much of an effect), signing deals with several partners for Android phones, and increasing the number of ads and content partnerships shown on YouTube.

This is still a company that gets the vast majority of its revenue from search advertising, however: none of those other businesses (save display ads) has the nearly the same kind of direct effect on Google's bottom line that its search ad business produces.

It's unclear whether Google is prepared to provide more color on the profitability of these other businesses, especially YouTube. The company willingly paid about $1 billion more than its own internal valuation to get its hands on YouTube, but while Google executives have hinted they are getting close, there's still no indication that YouTube has approached the break-even point three years after its acquisition.

YouTube profitability was "a high priority" for Google in 2008, but once the ad market collapsed in late 2008 that goal fell by the wayside. Now, as ad revenue shows signs of potential revival and now that Google has a better system for matching display ad buyers and sellers, it stands to reason that YouTube profitability is once again at the top of Schmidt's priorities.

Following the presentation of the financial results, expect Schmidt to face several questions about the vacancy on Google's board of directors, following Art Levinson's decision to end his dual role on both Google and Apple's board by stepping down from Google's board on Monday. Levinson's departure followed Schmidt's departure from Apple's board a few months ago in the wake of an FTC inquiry over the shared roles, which seems to have been closed following Levinson's move.

Google still faces government scrutiny in other areas, such as its hiring practices and its Google Books settlement with authors and publishers. Google is currently reworking the terms of the settlement to satisfy the concerns of the U.S. Department of Justice, and has been ordered to produce a revamped deal by November 9.

But for the most part, Google's Thursday afternoon appears to be shaping up as a hopeful sign that while the pace of economic recovery in the tech industry may be slow, is it recovering.