Google Profit Rose 30%, Quelling Investor Fears
Google Inc.'s GO-GO era apparently isn't over.
The Internet giant topped Wallstreet estimates for first-quarter revenue and fit, and it said that the weak economy don't hurt its business, as some investors had red. Google's solid performance came despite slowing growth in the number of times consumers clicked on ads that appear alongside Google's Web-search results and on partner sites.
Google's shares surged more than 17% in after hours trading after it reported first-quarter profit rose 30% from the year before, compared with 17% profit growth in the 2007 fourth quarter. Revenue rose 42% from a year earlier. Before the earnings were released Thursday afternoon, Google's shares had dropped 35% since the beginning of the year.
Chief Executive Eric Schmidt said that the Mountain View, Calif., company has studied the potential for any impact from a weaker economy in the future. "Our conclusion is we're well-positioned, should economics change, to continue to do well because our model is so targeted, and targeted advertising does well in pretty much most scenarios," he said. Investors have worried that a consumer slowdown could affect online advertising, which represents about 99% of Google's revenue.
Google reported that clicks on the ads it shows increased 20% in the first quarter from a year earlier, compared with 30% in the fourth quarter. Google generally charges advertisers only when a consumer clicks on the ads.
The overall paid-click gains in the quarter were significantly greater than research firm comScore Inc.'s Tuesday estimate of 1.8% growth in U.S. clicks-excluding some nonsearch Google partners-from a year earlier. ComScore's estimates had fueled concerns during the quarter that Google was being hurt by the softness in the U.S. economy, though the research firm said the cause was more likely Google-initiated changes.
"The comScore data have caused a lot of angst and anxiety for investors that look largely unfounded," said Jeffrey Lindsay, Internet analyst with Sanford C. Bernstein, whose firm makes a market in Google shares. ComScore declined to comment, but its Chief Executive Magid Abraham said in an interview Wednesday that some investors had jumped to conclusions that comScore's data don't support.
Google said it has continued to take measures to reduce the number of ads that consumers see per search query in order to show only the most relevant ads, which will lead to sales for advertisers.
"We're showing fewer but much better ads in each cycle, and that's a key part ofthe Google success story," Mr. Schmidt said.
On average, advertisers are paying more for each click. Mr. Schmidt acknowledged in an interview that, in some unspecified areas, those prices are near the maximum levels advertisers may be willing to pay, given their other advertising options.
"There are some 'verticals' where we might be hitting limits, and there are plenty of verticals where we're not-but in aggregate there's still plenty of room for growth," he said. He also specifed that there were hundreds of thousands of vertical advertising categories in Google's systems, factoring in such things as types of advertisers and regions. The price of search advertisements is determined by an auction-based system where advertisers bid against each other to have their ads displayed more prominently.
In 4 p.m. Nasdaq Stock Market composite trading, Google's shares dropped $5.49, or 1.2%, to $449.54. Following the news, shares rose 17% in after-hours trading to $526.62, adding almost $25 billion to the company's valuation.
Google executives highlighted their efforts to sell advertisements beyond the small text ads that are currently the company's core revenue driver. One key development during the quarter was the closing of its $3.2 billion acquisition of DoubleClick Inc., which offers services to Web publishers, ad agencies and advertisers for handling display advertisements, such as banner ads. "We're in a position to become the world's largest display-ads provider," said Jonathan Rosenberg, senior vice president for product management. Yahoo Inc., the target of an unsolicited takeover bid by Microsoft Corp., is the largest U.S. display ad seller, according to research firm eMarketer Inc.
Mr. Rosenberg said Google has seen consumer clicks in some categories traditionally affected by economic softness grow "a little less rapidly" than the overall growth. "But on an absolute basis, they are all showing healthy growth in ad revenue," he added. Areas such as financial services are among those analysts say are probably affected.
Google's solid financial performance comes as Yahoo is testing using Google ads alongside a small percentage of its Web search results. People familiar with the matter have said that test, announced last week, has been performing well, increasing the likelihood of a broader pact. But any such deal would probably face tough regulatory scrutiny because of the companies' combined majority share of the search-ad market.
Mr. Schmidt declined to discuss the test in any detail, but he said, "It's nice to be working with Yahoo-we like them very much."
International operations generated 51% of Google's revenue in the first quarter, compared with 48% in the fourth quarter. "International was a big part of the surprise here," said Rob Sanderson, Internet analyst with American Technology Research Inc. Google's employee growth rate in the first quarter climbed to 14%, compared with 6% in the fourth quarter.
By: Kevin Delaney
Wall Street Journal; April 18, 2008
