Update: Google reports strong revenue, earnings growth in Q3

Net income grows to $381 million for the period

Google Inc.'s revenue almost doubled in its third quarter, ended Sept. 30, 2005, and net income rose more than sevenfold, the Mountain View, California, company reported on Thursday.

Google's revenue reached $1.58 billion, up 96 percent compared to 2004's third quarter. Excluding the money that Google pays to third-party affiliates of its online ad network, revenue was $1.05 billion. These third-party payments are commonly referred to as traffic acquisition costs (TACs).

Net income grew to $381 million, or $1.32 per share, from $52 million, or $0.19 per share in 2004's third quarter.

Pro forma net income, which excludes certain items, such as stock-based compensation and in-process research and development (IPR&D) charges, came in at $437 million, or $1.51 per share.

Although the quarter is usually a slow one for Internet companies, Google did exceedingly well, Chief Executive Officer Eric Schmidt said in a conference call to discuss the results. "This momentum shows that we're effectively connecting with our users and our customers," he said.

Larry Page, Google's co-founder and president of products, addressed the company's recent proposal to provide wireless Internet access throughout San Francisco, calling it an experiment to see how Google can offer new services.

"We're excited about expanding Internet access in general. We think that's really good for our business: As people have better access to the Internet, they do more searches and they use our services more," Page said, adding that the company has no plans at the moment to make similar proposals in other cities.

In a recurring topic during the call's question-and-answer session, financial analysts asked several times whether Google has plans to diversify its online ad model, which is currently based almost exclusively on the pay-per-click approach, and whether the company plans to move closer to a performance-based model, in which advertisers would pay only when a click-through generates a sale, for example.

Without providing many details on plans under development, executives pointed out that Google is continually looking to expand and improve its advertising programs, offering as an example its acknowledged test of traditional print advertising with some of its clients. Along with selling online ads, Google has also begun brokering the sale of ads in print magazines.

Omid Kordestani, Google's senior vice president of global sales and business development, also acknowledged that Google is working on adding performance-based characteristics to its ad programs, saying: "We're looking at ways to bring this accountability and extend it," he said.

Google wants to bring the ad programs "as close as possible to the ROI [return on investment] metrics everyone is interested in," Kordestani added.

Schmidt stressed the importance to Google of its partnership with America Online Inc. (AOL) when he was asked to comment on reports that AOL has been in talks with Google, Microsoft Corp. and Yahoo Inc. in recent weeks about a possible sale of all or part of the company.

"AOL has been our longest and in many ways our tightest partner for many, many years: We have teams that collaborate on a wide variety of activities," Schmidt said. He declined to address specifically the reports published by various media outlets, including The Wall Street Journal and The New York Times,which have been based on information provided by anonymous sources

"[AOL is] a very valued partner, and we hope that will be true forever," he added.

Schmidt also declined to comment specifically on what Google is doing regarding the integration of VOIP (Voice Over Internet Protocol) and instant messaging in its Google Talk IM product.

He acknowledged that IM and VOIP "will become very significant components of people's online experience," but he cautioned against outside speculation over Google's direction in this area.

"We don't do the same thing as everyone else does, so if you try to predict our product strategy by simply saying 'Well, so and so has this and Google will do the same thing,' it's almost always the wrong answer," Schmidt said.

Asked to what extent the Web mail service Gmail is generating revenue for Google, Sergey Brin, co-founder and president of technology, said that currently Google sees the service more as a platform to experiment and build other things on top of, such as Google Talk, rather than as a revenue generator.

Looking ahead, Schmidt said he believes Google has plenty of room to grow its business in many different directions.

"What's great about this business is that it can be extended very broadly," he said. "This is a very, very big space that we're in, and that's why it's exciting to be part of Google."

Copyright © 2005 IDG Communications, Inc.

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