News

Google 1Q Profit Rises 69 Percent

• By The Associated Press
• April 20, 2007

The company has flashed its financial prowess once again, reporting a 69 percent increase in first-quarter profit to surpass analyst projections by 38 cents per share. Google has now delivered pleasant earnings surprise in all but one of 11 quarters since going public in August.

Investors showed their appreciation by driving up Google's stock price by $17.66, or 3.7 percent, to $489.31 in Friday morning's trading on the Nasdaq Stock Market. The report was released after Thursday's close.

It has become more difficult for Google to impress Wall Street because its stock is scaling lofty heights and investors have become accustomed to the company's eye-popping earnings growth, said Global Crown Capital analyst Martin Pyykkonen. "The stock isn't going to double or triple like a few years ago, but it's still a good growth stock to have in your portfolio," he said.

Born less than decade ago, Google now reigns as the most profitable -- and probably most powerful -- force on the Web.

As usual, Google's financial firepower flowed from its search engine. That ubiquitous tool has become the hub of the Internet's largest marketing network and appears to be getting even better at identifying the right ads to display with its search results, which in turn helps elicit more revenue-generating clicks.

The paid clicks on the ads within Google's vast network increased 52 percent in the first quarter compared with year-ago levels. And more of the clicks are occurring on Google's own Web sites, increasing the company's profits because the revenue doesn't have to be shared with an advertising partner.

Mountain View-based Google is getting more opportunities to serve up ads largely because Web surfers are using its search engine more frequently. In March, Google processed 3.5 billion search requests in the United States, translating into a 48 percent share of the overall market, according to comScore Media Metrix. Sunnyvale-based Yahoo was a distant second, processing 2 billion search requests, or 27.7 percent of the U.S. market.

While Yahoo's first-quarter profit fell, Google earned $1 billion, or $3.18 per share, during the first three months of the year. That compared with net income of $592.3 million, or $1.95 per share, in the same period last year. It was also the second consecutive quarter in which Google earned $1 billion -- more than many more-established media companies make in an entire year.

If not for expenses incurred for employee stock compensation, Google would have earned $3.68 per share. That figure topped the average estimate of $3.30 per share among analysts surveyed by Thomson Financial.

Quarterly revenue reached a new company high of $3.66 billion, a 63 percent increase from $2.25 billion a year earlier.

After subtracting advertising commissions and other payments to its partners, Google's revenue totaled $2.53 billion. That amount was about $40 million above analyst estimates.

"We are ecstatic about our financial results this past quarter," Google Chief Executive Officer Eric Schmidt crowed in a conference call with analysts. Schmidt, Google's CEO for nearly six years, also became chairman of the board in a promotion announced Thursday.

The quarter wouldn't have been as impressive without a favorable tax rate of 26 percent during the first quarter -- below the company's projected rate of roughly 30 percent for the entire year. Google's earnings would have fallen by 18 cents per share had the first-quarter tax rate been 30 percent, American Technology Research analyst Rob Sanderson estimated.

Google-owned sites accounted for 62 percent of first-quarter revenue, up from 58 percent at the same time last year. The company also is becoming increasingly influential outside the United States: Google booked 47 percent of its revenue internationally in the first quarter, up from 42 percent last year.

Although Google has been trying to develop other revenue channels beyond the Internet, online advertising continues to produce virtually all of its profits. The company is expected to become an even more dominant force in that business with last year's $1.76 billion acquisition of online video leader YouTube Inc. and its recently announced $3.1 billion deal to buy Internet ad distributor DoubleClick Inc.

"It's becoming such a powerhouse franchise that it's difficult to see where the competition is going to come from," Sanderson said.

Global Equities Research analyst Trip Chowdhry still thinks Google's dependence on its search engine could become its Achilles' heel. "Right now everything looks good, but it still seem like one-trick pony," he said. "The question is can they sustain this six to eight months down the road?"

Although Google still isn't making money off of YouTube, the site is "going gangbusters," co-founder Larry Page said during Thursday's conference call.

Worried that Google will gain too much control over the online advertising market, both Microsoft Corp. and AT&T Inc. are urging government regulators to block the DoubleClick deal.

The complaints from two companies that have been previously penalized for monopolistic behavior amused Google co-founder Sergey Brin. "I hear Standard Oil is going to complain too," Brin said in a Thursday interview. "I think (the concerns) are misplaced."

Besides buying other companies, Google is investing heavily to accommodate its growth by hiring workers and adding computer capacity at its data centers. The company spent $597 million on capital expenditures in the first quarter and hired another 1,564 employees to expand its work force to 12,238 people.

Even so, the company ended the quarter with $11.9 billion in cash.