April 21, 2005 4:29 PM PDT

Google blows past estimates

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update Google on Thursday reported stellar first-quarter profits on revenue that nearly doubled from last year, beating analyst expectations on the strength of search-related advertising.

The Web-search bellwether reported net income of $369.2 million, or $1.29 a share, on revenue of $1.26 billion in the three months ended March 31. That compares with net income of $64 million, or 24 cents a share, on revenue of $651.6 million in the comparable period a year ago. The results include a $49 million charge related to stock-based compensation.

Analysts had expected the company to earn 92 cents per share on revenue of $729.8 million, according to estimates from Thomson Financial.

"Google's defying the logic of growth companies."
--Jordan Rohan, analyst, RBC Capital Markets

In after-hours trading, Google shares were up more than 6 percent to $217.05.

Jordan Rohan, a financial analyst at RBC Capital Markets, was befuddled by the company's momentum, given that it has increased its operating profit margin to 35.2 percent of revenue from 23.8 percent a year ago. Most young companies must decrease their margin to boost revenue, but Google has managed to decrease its costs to acquire new partners.

"Google's defying the logic of growth companies," Rohan said.

The Mountain View, Calif.-based company, which went public late last year, attributed the performance to booming Web traffic and advertising sales. Google makes 99 percent of its money from advertisements that appear atop or adjacent to search results, as well as those on partner sites. The company is continually introducing new products and software in the effort to extend those ads into new realms, according to its management team.

"Pay-for-performance advertising provides value to end users," Eric Schmidt, CEO of Google, said on a conference call. "We speculate on 20 categories where an existing business could benefit from (Google's model)...and we're certainly going to extend it as far as we possibly can."

Google derived 52 percent, or $657 million of its revenue directly from its own sites. Sales from partner sites contributed 47 percent or $584 million of total revenue. Google paid fees of $462 million to its partners in the first quarter, up from $271 million a year before, for what's known as traffic acquisition costs.

The company declined to say whether it's developing a Google Web browser, as rumored, but Schmidt said that the company's goal is to build applications that solve end user problems. "So far, you can see the amazing things possible inside the browser application if you look at maps," he said, referring to the company's latest mapping service.

Google executives also were asked about innovating in server architecture in the future, given that one of the company's biggest rivals, Microsoft, is developing search tools on a 64-bit architecture. Google currently runs its search service on a 32-bit architecture. Search experts say that platform may allow for advancements such as better personalization.

Google co-founder Sergey Brin downplayed the importance of the underlying architecture. "I do not expect that the particular choice of server architecture is going to be a deciding factor in the success of our service," he said.

Analysts on the conference call also asked about the threat of click fraud--or the practice of third parties inflating traffic to search ads for financial benefit. Brin answered by saying that it was not a real problem for Google because it has sophisticated algorithms to eliminate fraud, but no system is foolproof. In the future, he said, the company will show advertisers more value from their campaigns "beyond clicks" and via new monitoring tools in the works.

Despite many remaining questions about where Google's business is headed, financial analysts were impressed. (As a policy, Google does not provide financial guidance.)

"Google doesn't answer many questions, but its results speak pretty clearly," Rohan said.

3 comments

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Google rakes in big?!
There is a ripple effect on other niche players in the market that also survive on Google's business model sourcing adverts. This Includes the success of my portal GaramChai.com that caters to the niche immigrant community...

Manager,
<a class="jive-link-external" href="http://www.garamchai.com" target="_newWindow">http://www.garamchai.com</a>
Posted by b2bhandshake (83 comments )
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Nice cashflow........do I smell fraud?
My first thought was does Google have the expertise to create bots to click through? If so, they may as well kick it 42%. Or is that too blatant?
Posted by (1 comment )
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Maybe, but....
They have the position to do anything they want. They could go in and just charge someone for 1,000 extra clicks if they wanted to (ignoring the legal side of it) ...... but the companies forking out the money for those clicks are obviously seeing value and a ROI for what they're paying which means that those numbers are real and not done by robots.
Posted by (1 comment )
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