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Google doubles year-over-year profit

In first report as a public company, search giant posts third-quarter profit of $52 million, thanks to booming online ad revenue.

Tech Industry
Reporting for the first time as a publicly traded company, Google recorded a third-quarter profit of $52 million that more than doubled on booming online advertising revenue.

The Web search company, based in Mountain View, Calif., posted net income of $52 million, or 19 cents a share. That compares with net income of $20.4 million, or 8 cents a share, in the comparable period in 2003.

Revenue in the third quarter was $805.9 million, up 105 percent from the $394 million reported for the third quarter of 2003. Revenue was up 15 percent sequentially from the second quarter.

Excluding a one-time charge of $201 million from a patent dispute settlement with rival Yahoo, Google reported net income of $125 million, or 45 cents per share, on a diluted basis. The charge was offset by associated and pre-IPO tax benefits.

"We told investors from the start that Google is an unconventional company," Google CEO Eric Schmidt said on an investor conference call. Schmidt added that Google had said it would build its business based on a long-term vision of financial success. The company, however, is also "very pleased with our revenue on the short run," Schmidt said.

Schmidt added that he would not give future guidance.

Google's shares closed up 6 percent to $149 on the Nasdaq stock exchange. In after-hours trading, shares were trading as high as $161, according to Island ECN.

Google attributed the better-than-expected profit and revenue growth to surging traffic on its Web site and partner sites, more advertisers and more "clicks" on the text ads that accompany search results.

Even a seasonal downturn was muted this year as a result, Google CFO George Reyes said.

"We've seen improvements from advertising--sometimes it's better click-through rates (from targeting), sometimes it's more advertisers, sometimes it's from international growth," Schmidt said.

At the end of the quarter, Google reported that it had $1.86 billion in cash, cash equivalents and short-term investments. As of Sept. 30, Google employed 2,668 full-time staff globally, up from 2,292 in June.

On the question of stock-option grants, Reyes said Google would be "lean and judicious" about its employee equity rewards.

Google reported that so-called traffic acquisition costs, or costs to acquire new distribution partners for its advertisements, rose to $302.9 million in the third quarter, comprising 79 percent of revenue in the Google network. That compares with $143.5 million in the third quarter of 2003, when such fees comprised 82 percent of revenue.

Traffic acquisition costs equate to the fees that Google pays partners, such as newly acquired partnership with AOL Europe, when it splits off advertising revenue from pay-per-click ads.

Still, revenue from partnerships with America Online, EarthLink and many others was $384.3 million in the third quarter, an increase of 120 percent in the comparable period a year ago. That revenue comprises 48 percent of Google's total sales.

Revenue from Google's site generated $411.7 million in the third quarter, or 51 percent of total revenue. That number increased 99 percent from the third quarter of 2003. Just a beginning
Larry Page, a Google co-founder, said the company has only begun on its mission to make the world's information searchable. He pointed to several new products from Google, including Desktop Search, a tool for retrieving documents on the PC; and Google Print, a searchable database of books. He also highlighted the company's free e-mail service, Gmail, Web publishing with Blogger and photo management with the newly acquired Picasa.

Page said that while some analysts have expressed concern about Google's reliance on online advertising, he is assured that there is a big market opportunity--made possible by the continued expansion of its products internationally and innovative new services, he said.

"We're looking toward a long, bright future with these products," Page said.

Google has also begun testing image ads, in an effort to appeal to brand advertisers. "Today, the image ads are an important new product, but we think it has a bright future," Schmidt said.

Google co-founder Sergey Brin also highlighted international expansion as promising, after Brin and Page's recent two-week trip abroad. During that time, Google opened an office in Dublin, Ireland, he said.

Schmidt said that while Gmail and Froogle, its comparison shopping service, are not significant revenue centers yet, both are important to the company's growth. Gmail, Google's free Web-based e-mail service, has been a "tremendous success" in the several months it has been tested, but he indicated that it will likely be in beta for a while. Froogle, by contrast, will begin to be more integrated with Google's main site, Schmidt said.

Answering a question on whether Google would become a portal, Schmidt said the company will take a different approach, already reflected in products such as Gmail. Google's vision is to bring products to market that satisfy people's needs, he said, and either buy or build in that market.

"We look for opportunities...to solve problems...in new and different ways," Schmidt said.

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