Friday, April 18, 2008

Google trounces estimates with 30% increase

The slowing U.S. economy did not seem to slow down Google, which reported a surprisingly strong surge in first-quarter profits Thursday.

Google's net income jumped 31 percent to $1.31 billion and revenues swelled 42 percent to $5.19 billion compared to the same period last year.

The report trumped many Wall Street analysts, who had reduced their forecasts for Google's growth based on third-party research that suggested fewer people were clicking on Google ads.

"Google has completely silenced the cynics," said Jeffrey Lindsay, a senior analyst with Bernstein Research.

In a conference call with analysts, Chief Executive Eric Schmidt said Google was still not feeling the drag of the struggling U.S. economy. Google executives made similar statements in January.

"It's clear to us that we are well positioned for 2008 and beyond, regardless of the business environment we find ourselves surrounded by," Schmidt said.

Google also put to rest any lingering concern about clicks, reporting that advertisers paid for 20 percent more of them during the first quarter of the year than they did during the same period in 2007. While this marked a significant slowdown from prior quarters, it was much more than the 1.8 percent growth calculated by the comScore research firm.

Based on the comScore report and other calculations, Wall Street analysts had expected Google to report net revenues of $3.59 billion and earnings of $4.52 per share.

Instead, Google's net revenues were $3.7 billion and earnings were $4.84.The ace in Google's hand: international sales, which surpassed its U.S. sales for the first time. Revenue from outside the United States was $2.65 billion or 51 percent of total revenue. The boom in international business helped Google lower its tax rate to 24 percent from 25 to 27 percent last year.

Google also benefited from the weak dollar, earning an extra $202 million.

"Google should be effectively considered a global company," said David Garrity of Dinosaur Research. Garrity, who had rated Google a buy with a price target of $534, said the Mountain View company could climb back up to its 52-week high of $747.24 over the next year.

Google's stock, which had slumped 30 percent since the beginning of the year, vaulted as much as 17 percent in after-hours trading to $525.96 after closing at $449.54 on Thursday.

Separately, a source familiar with the matter confirmed that Yahoo is close to sealing a partnership with Google. Last week, the two companies announced Yahoo would test Google search ads to see if they were more lucrative than Yahoo's own ads.

In an interview, Google co-founder Sergey Brin said Google was excited to be working with Yahoo.

Doug Anmuth, an analyst with Lehman Brothers, estimates a full-fledged outsourcing deal between Yahoo and Google could increase Yahoo's annual revenues by $300 million this year and Google's annual revenues by $190 million.

Still, any arrangement would likely be scrutinized by antitrust regulators.

Google continued to add workers in the first quarter, hiring an additional 2,351 employees for a total workforce of 19,156.

Google is counting on its new hires, including about 1,500 from DoubleClick, which provided software for display advertising, to help it expand beyond search advertising.

"I really feel we are in a position to become the world's largest display ad provider," Jonathan Rosenberg, senior vice president for products, told analysts during the conference call.

In an interview with the Mercury News, Sergey Brin said he also has high hopes that Google's online applications, which include a calendar, word processor, spreadsheet and presentation software, can eventually be as robust a business as search advertising is today.

"When we got into the advertising business, our first attempt in advertising on search got us enough money to buy pizza for the team that created it," he recalled.

Brin said Google's advertising business has grown "by various miracles, time and patience."

Google currently charges businesses to use a premier edition of its free productivity applications and displays advertisements that are targeted to the content of emails hosted by its Gmail service.

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