Google grows profit and revenue in Q1

Google exceeded Wall Street's expectations for profit and revenue, pacifying fears it would report a weak first quarter

Google posted solid growth in its revenue and profit during 2008's first quarter and exceeded Wall Street expectations in both categories amid widespread concern that the search engine giant's results would be weak.

Google generated revenue of $5.19 billion for the quarter that ended March 31, up 42 percent compared with 2007's first quarter, Google said Thursday.

Excluding the advertising commissions it pays to Web site publishers that carry its ads, Google posted revenue of $3.7 billion, beating the $3.608 billion consensus estimate of financial analysts polled by Thomson Financial.

The company had net income of $1.31 billion, or $4.12 per share, compared with $1 billion, or $3.18 per share, in 2007's first quarter.

On a pro-forma basis, excluding certain items, net income was $1.54 billion, or $4.84 per share, topping analysts' expectation of $4.52 per share.

Google's ability to continue generating solid revenue and profits from its search advertising business came under scrutiny in recent months, as several independent studies suggested that people were clicking less than expected on its pay-per-click ads and that rival Yahoo is stealing market share. However, the first quarter results at first glance don't seem to indicate any major breakdown in Google's revenue-and-profit making machine.

Google reported paid-click growth of 20 percent year-on-year during a quarter when the company tightened its ad-targeting technology to serve fewer but more relevant ads, executives said during a conference call.

"Paid-click growth was much higher than has been speculated by third parties. In search, we continue to invest in quality, particularly internationally, and quality improvements lead to increased traffic and share," said Eric Schmidt, Google's chairman and CEO.

Reports from comScore in January, February, and March indicated that Google's paid-click growth rate had slowed down significantly in the U.S., leading to concerns that the company would report disappointing results.

But Schmidt repeated explanations given recently by other Google executives, that the company has been purposefully serving fewer but more targeted ads to its users, and that these efforts increase the value of those clicks to advertisers.

"We're showing fewer but much better ads in each cycle. That's a key part of the Google success story," Schmidt said. "We're putting more and more flexibility and control in the hands of advertisers so they can decide exactly where the ads should go and measure it in a way that … they couldn't before."

Also contributing to Google's success is the company's three-pronged strategy of ads, applications, and search, which "is beginning to show transformative effects" because it fosters increased Web use and propels ad revenue, he said. Schmidt added that Google hasn't been significantly affected by the recent economic downturn in the U.S.

Sergey Brin, co-founder and technology president, said Google rolled out about 100 material improvements to its core search engine during the first quarter.

Schmidt and other executives on the call stressed time and again that with DoubleClick, Google is poised to finally give its anemic graphic/display ad business a boost. "DoubleClick is hugely strategic for us. It allows us to offer a much more comprehensive solution for advertisers and publishers," Schmidt said.

Jonathan Rosenberg, senior vice president of product management, made a bold prediction for Google's graphic/display ad business. "From a big-picture perspective, we really feel we're in a position to become the world's largest display ad provider," he said.

In addition to DoubleClick, Google is counting on YouTube to boost its graphic/display ads, as well as potentially other Google-owned sites like the Orkut social network and Images search engine, as well as in partner sites, Brin said. "We're pretty optimistic on both fronts," Brin said.

So far, most of Google's revenue comes from the pay-per-click text ads it serves up along with its search results and in the sites of its advertising partners. While being the best provider of this type of ad has been enough to power the company's eye-popping revenue and profit growth, the consensus inside and outside of Google is that it needs to diversify into other online and offline ad formats.

Asked about last week's surprising announcement that Yahoo would test running Google search ads, Schmidt said: "We're very excited to be participating in this test. I don't think it's really appropriate to speculate beyond that, but it's nice to be working with Yahoo and we like them very much."

The test is the latest maneuver by Yahoo to avoid being acquired by Microsoft, which has said it will resort to hostile tactics because it needs the acquisition to compete against Google. If the test goes well, it is believed that Yahoo would consider outsourcing all or most of its search ad business to Google, because doing so could significantly increase Yahoo's cash flow.

Google's first quarter results include the operations of DoubleClick starting on the date when the acquisition closed, March 11, until the quarter's end, but their impact was immaterial to revenue and "only slightly dilutive" to net income and earnings per share, Google said.

Copyright © 2008 IDG Communications, Inc.

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