April 19, 2007 1:52 PM PDT

Google first-quarter profit rises almost 70 percent

Google's first-quarter profit rose 69 percent and results beat Wall Street expectations as the company turned search market share gains into even more revenue from its core paid search advertising business.

"We are ecstatic about our financial results this past quarter. Our core business is very strong. It is the core business that is driving our success," Google Chief Executive Eric Schmidt said in a conference call with analysts. "International growth is even better" allowing the company to "take calculated risks in new markets and new products," he added.

International revenue represents 47 percent of the total, said George Reyes, Google's chief financial officer.

Net income for the first quarter was $1 billion, or $3.18 a share, up from $592 million, or $1.95 a share, a year ago. Excluding one-time items such as employee stock-based compensation, income was $3.68 a share, higher than analyst expectations of $3.30 a share, according to a poll by Thomson Financial.

Total revenue reached a new high of $3.66 billion, up 63 percent from $2.25 billion a year earlier. Excluding traffic acquisition costs, or commission paid to content partners, revenue was $2.53 billion. On that basis, analysts were expecting revenue of $2.49 billion. Google paid $1.13 billion, or 31 percent of advertising revenues, in commission to partners.

Paid search represents nearly all of Google's revenue at this point. However, if its planned $3.1 billion acquisition of DoubleClick goes through, it will have a huge display, or banner ad, business, too. The company is aggressively expanding its advertising platform to the offline world, including partnerships to sell ads to run on Clear Channel radio stations, on EchoStar Dish satellite TV network and in newspapers.

Reyes said the company will continue to rely on its successful automated online advertising system that has become a model in the industry for serving up context-related ads that appeal to Web surfers. "Targeted and effective advertising will continue to be our mantra."

More people use Google than any other search engine, and Google is able to make more money off those clicks on ads than its rivals. Google is expected to pocket three-quarters of the money spent on paid search in the U.S. this year, according to a new report from research firm eMarketer.

Nielsen/NetRatings gives Google a 55.8 percent share of the U.S. search market, compared with Yahoo's 20.7 percent and Microsoft's 9.6 percent, while Hitwise puts Google's share at 64 percent, Yahoo's at 21 percent and Microsoft at 9 percent.

The Google earnings report is a sharp contrast to the first-quarter results announced by Yahoo on Tuesday in which the company saw net profit drop 11 percent from a year ago and failed to meet Wall Street expectations. The stock fell more than 11 percent in after-hours trading when Yahoo's new advertising sales system failed to deliver on inflated expectations.

Google's stock, which closed the day at $471.65 a share, rose 2.7 percent in after-hours trade following the earnings announcement.

"The stock is performing well because it is not priced for the company to continue to hit the numbers," said Scott Devitt, an analyst at Stifel Nicolaus. "Google is growing at twice the rate of the industry and about six times the rate of Yahoo. This is the blue chip growth company of the sector, and one of the remaining large (market) cap Internet companies that is a true growth company."

Google does not provide forward guidance, but Schmidt did warn that the second quarter is typically weaker than the first quarter.

The company also announced that Schmidt had been elected to be chairman of the board of directors and Stanford University President John Hennessy was elected lead independent director.

Google's hiring spree remains strong, with the number of full-time employees growing to more than 12,000 from just more than 10,600 at the end of last year.

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7 comments

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Congrats Google!
Good for them! Congratulations. They did a great job with mostly everything they do. They deserve it.
Posted by jazyfko (5 comments )
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Impossible business plan ?
That's what Steve Ballmer said, they wish they had what Google
has.
Posted by rmiecznik (224 comments )
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Where are all the naysayers?
I remember several years ago how everyone was saying that Google is overvalued, but where have all those people gone now? Google's P/E ratio is down below 50 and their EPS is about 10. Profit is still growing by double digit figures every quarter and profit growth over a one year period is 70% compared to the same quarter a year ago. Google's growth is slowing, but 70% annual profit growth isn't sustainable forever.

At some point you the FTC won't allow them to buy into other companies in their sector. (There are already concerns for the Doubleclick deal) Unless you can decimate another competitors' market share or cause the internet advertising market to grow faster than it has been Google's profit growth will eventually settle to a more reasonable 10%-20%.

All things considered Google's future still looks brighter than Microsoft's. If not for dividends I think most people would have sold their Microsoft stock years ago. Despite billions spent in marketing and R&D Microsoft has done little to chip away Google's dominance. If they did we would be reading stories about it. The problem is that Microsoft can't leverage their OS to dominate this market like they can with software products. I hope all of the Google critics from 2-3 years ago will admit they were wrong. Vista hasn't done anything to Google. Yahoo's Panama hasn't done anything to Google. Microsoft's Live search is barely used by anyone outside of Redmond who hasn't been paid to use it. Just because GOOG isn't growing like crazy anymore doesn't mean that Google doesn't have long term potential.
Posted by BigGuns149 (790 comments )
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A P/E of 48 is bad and so is market domination
I can't believe you are boasting about a P/E of 48 (almost 49 in afterhours trading). Furthermore, I don't know how you calculated that growth will plateau at 10-20%. You clearly don't know what you are talking about.

To everyone else who thinks that Google dominating search is a good thing, I completely disagree. Just as having Microsoft dominate the OS market isn't necessarily beneficial for the consumer, Google controlling the search market will stifle competition and lead to a monotonous search market. Competition is good for consumers and for some reason I think people are failing to remember this when it comes to Google.
Posted by a85 (104 comments )
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Nice one!
Just proves that you don't have to be evil to make billions.
Posted by t8 (3716 comments )
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well, I'll nay say
My own consumer goods company recently stopped using
Google ads. Our problem was the %0.5 conversion ratio on a
very expensive click through. We can get a conversion ratio ten
times that from Yahoo and the click throughs for our keywords
cost about half as much there. I tend to think Google's opaque,
self-controlled, unaudited market is designed to create prices
that favor google and ad-hosts over advertisers. I also wonder if
Google attracts more of the type of users who put shameless
words like "Click through ads to support our content, " on their
web pages.

My secondary concern as a user is the "Google Ecosystem" which
is more and more becoming pages full of advertising on one
subject that fill up the first page of search results. (Ross Perot
has a company devoted to doing this, supposed to be pulling
over $100M/year earnings which means Google is making at
least $200M/year off the scheme-- I assume others are doing
the same, all that makes one wonder about the quality of
Googles earnings, we are not going to keep using Google for
searches if all we get is pages of pure advertising without
meaningful content).

Otherwise, my big concerns are the liability issues from
copyrighted content (Particularly given the last Australian court
judgement on the issue and that Australian courts take the same
expansive views of jurisdiction that American courts do), the
failure to monetize anything other than search, and a lack of
traction outside the search business.
Posted by wylbur (110 comments )
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