Google clears Wall Street profit estimate

Despite economic worries, Google exceeds Wall Street expectations for profitability. Stock rises more than 10 percent in after-hours trading.

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Stephen Shankland
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Google topped pessimistic Wall Street profit expectations Thursday, reporting a net income increase of 31 percent to $1.31 billion for its most recent quarter.

Excluding various items, that meant earnings per share of $4.84, well above the $4.52 expected on average by analysts surveyed by Thomson Financial. Revenue, which benefited an "immaterial" amount from the acquisition of DoubleClick, was $5.2 billion in the quarter ended March 31, compared with $3.7 billion for the same period a year earlier, the company said.

Excluding $1.49 billion in partner commissions called traffic acquisition costs, Google's revenue was $3.7 billion. That result was 46 percent greater than the year-earlier amount and about $100 million more than the $3.6 billion analysts expected.


The company's stock surged more than $76, or 17 percent, to $525 in after-hours trading. That's a significant step back toward the company's all-time high of $747.24 in November.

"Our ongoing innovation in search, ads, and apps (online applications) helped drive healthy growth globally across our product lines, yielding another strong quarter for Google," said Google Chief Executive Eric Schmidt in a statement.

The report comes amid fears that an economic slowdown or recession could be hurting Google's paid-click results, the number of text ads that Web searchers click on.

Recession-proof? So far
Schmidt essentially called those fears baseless.

"It's clear to us that we're well positioned for 2008 and beyond, regardless of the business environment that we find ourselves surrounded by," Schmidt said on a conference call. "We've looked at this really carefully, and we do not see an impact as of this time."

And if economic conditions do deteriorate, Google expects to weather the storm fine, Schmidt added. "Our conclusion is we're well positioned should economics change. We continue to do well because our model is so targeted, and targeted (advertising) does well in most scenarios," he said.

Google's text ads are geared to correspond to search results, presenting ads at what the company calls the "magic moment" when a person's search can indicate interest in a specific subject.

Google has been concentrating on showing fewer ads but making them better-suited to search results, a move it hopes increases the revenue generated by each click. But statistics from ComScore released this week show that compared with the fourth quarter of 2007, paid-click growth slowed in the first quarter for Google and Yahoo and that paid clicks flat-out declined for Microsoft's MSN.

Paid-click growth
Last quarter, Google's financial performance fell short of Wall Street expectations, triggering fears that economic woes might be hurting the company. Schmidt pooh-poohed the idea, at least for that quarter, by saying: "We have not yet seen any negative impact from rumors of future recessions. We'll see what happens."

Google said paid clicks increased 20 percent over the first quarter of 2007 and 4 percent over the fourth quarter of 2007.

Google and ComScore use different methods to measure paid clicks--for example, Google reports global numbers compared to U.S. tallies from ComScore--so it's not possible to directly compare Google's 20 percent quarter-over-quarter increase to the 1.8 percent increase ComScore reported for Google for the same period.

But Schmidt was willing to take a potshot, at least indirectly: "Paid-click growth is much higher than has been speculated by third parties," Schmidt said.

Google kept expenses down to $1.5 billion for the quarter. "We've had good, disciplined management of our operating expenses," Schmidt said.

The Mountain View, Calif.-based company kept hiring down to a mere 800, excluding the 1,500 that arrived with DoubleClick. Total head count now is 19,156, Chief Financial Officer George Reyes said. Google cut DoubleClick's staff by about 10 percent after the acquisition, and "an additional 15 percent, approximately, are expected to leave the company in the U.S. in the near to intermediate term because they are in a transitional role as they move through the system," Reyes said.

New ad frontiers
Google executives had optimistic words for a variety of expansion plans:

• In China, Google lags Baidu.com as the top search engine but hopes to take the lead within five years. Schmidt said Google's made progress in that area.

"We are seeing market-share growth and good revenue growth as we have learned to operate in that environment," Schmidt said. "We have significant new products with respect to Chinese knowledge, Chinese language, Chinese search."

• Most of Google's business comes from text ads, but graphical "display" ads are a priority, particularly with the acquisition of DoubleClick. Where will Google employ such ads?

Display ads in video form are already used on YouTube and Google is evaluating other possibilities. "There are some other Google properties that might be good fits, though we haven't made clear decisions," said co-founder Sergey Brin. Those include "visual sites like Orkut. And there's some potential like Google Images."

• Mobile advertising looks good in areas such as Japan where there are devices with high-resolution screens and responsive networks, Brin said.

"The mobile ads work very well. There's nothing to dissuade me it would be any worse than traditional desktop search," he said.

•  Social networking is a challenge when it comes to advertising. Google ads appear on its own Orkut site and on News Corp.'s MySpace, and there's "a tremendous amount of inventory" to be sold, Brin said.

"It takes some time for some advertisers to realize they're there and target them effectively," Brin said.

Google is working on it. "Social-networking monetization (has) been an area where we applied a lot of new technologies," Brin said. Demographic targeting, which lets advertisers get some idea about what types of people use a site, "has been very successful," he said.