Google first-quarter profit rises almost 70 percent

Results beat Wall Street expectations as the company turns search market share gains into even more revenue from paid search advertising.
Written by Elinor Mills, Contributor
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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