Google misses earnings expectations

But revenue stronger than expected in first quarterly report since IPO

Search maverick Google missed widely on Wall Street's earnings expectations for the quarter ended Sept. 30, 2004, its first quarterly financial report after launching its initial public offering.

Net income came in at $52 million, or $0.19 per share, compared with $20.4 million, or $0.08 per share, in 2003's third quarter. Net income before certain non-recurring items was $125 million or $0.45 per share, significantly below the $0.56 per share consensus expectation from analysts polled by Thomson First Call.

Google reported Thursday US$805.9 million in revenue in 2004's third quarter, an increase of 105 percent over the same quarter last year. Excluding traffic acquisition costs (TACs), which is revenue Google pays to its partners, revenue came in at $503 million, exceeding analysts' expectation of $456 million.

Google's stock (GOOG) started trading on Aug. 19 on the Nasdaq Exchange. Since then, the lowest price for the stock has been $95.96 and the highest $152.40. Its IPO price was $85.

The stock closed at $149.38, up 6.33 percent, on Thursday before the earnings report.

Google, based in Mountain View, California, and founded in 1998, generates most of its revenue from selling online ads that it serves up on its site and on the sites of companies in its ad network. The text ads are matched via relevant keywords to the content of pages or to search engine queries, so that an ad for basketballs would be tied to a page that mentions the term and would appear alongside relevant search results. These ads are commonly referred to as sponsored search ads.

Google, which gained prominence as the most widely used Internet search engine, has been expanding its reach both inside and outside the search market. In the search market, Google has launched special services and products, such as its recently announced desktop search application, its intranet search appliance, its Froogle comparison shopping service and Google Local service for narrowing Internet searches to a geographic area.

Other recent moves by Google in the search space have been the introduction of a beta version of Google SMS, which lets users of mobile phones and other wireless devices query the Google search index via short messaging service (SMS), and the official launch of Google Print, a program for publishers to have Google scan and index their books to make the content searchable through the company's search engine.

"It's clear to us that we have only begun work on our mission to organize the world's information and make it universally accessible and useful. Only a fraction of the world's information is indexed on our computers. We are perpetually working on ways to grow our indexes and developing new technologies for collecting and serving up the world's information," said Larry Page, co-founder and president of products, in a conference call to discuss the financial results.

Google is also actively reaching outside the search space. In July, it bought Picasa Inc., which makes software for organizing and managing digital photos and runs a peer-to-peer network for sharing digital photos. In April, it announced a Web mail service called Gmail, which is still in test mode. Last year, it acquired the Blogger Web log service when it bought Pyra Labs Recently, rumors have swirled that Google might be developing a Web browser and an instant messaging service.

Industry observers have pointed out that Google needs to broaden its scope to diversify its revenue stream and be in a better position to compete against rivals such as Yahoo, America Online and Microsoft. All three are moving aggressively to increase their share of the fast-growing and profitable sponsored search space.

In the second quarter, overall Internet ad spending was about $2.37 billion, a 42.7 percent increase over same period in 2003, according to a report issued in September by the Internet Advertising Bureau and Pricewaterhousecoopers. Search-related ads were the largest category with $947 million, according to the report. Display ads followed in a distant second place with $474 million. Classifieds came in third with $403 million.

"While some have expressed concern about our reliance on online advertising, we believe this market is very large and that we are at its infancy," Page said. "Technology innovations will make online advertising only more effective and desirable over time. This is due to innovations that continually increase the relevancy of ads" for users and advertisers. For example, Google has recently begun testing the delivery of ads in its image search service, Page said.

Google is also focusing on expanding its international presence, said Sergey Brin, co-founder and president of technology. He and Page recently returned from a two-week trip abroad during which they opened the company's new European headquarters in Dublin and visited several countries in Asia, he said. "We see great opportunities all around the globe," Brin said, adding that Google's international operations generated 35 percent of the revenue this quarter, up from 31 percent last quarter.

Although AOL uses Google technology to power its own Internet search service, Yahoo uses its own technology and Microsoft is developing its own technology as well. At the same time, AOL, Microsoft and Yahoo have online offerings that Google doesn't have, such as instant messaging services, and have had other online offerings longer than Google, such as Web mail services.

Copyright © 2004 IDG Communications, Inc.

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