Skip to main content
U.S. Edition
Search
 
 
 
 
 
 
 
 
 
 
 
WORLD BUSINESS

All signals go for Google

By Paul R. La Monica, CNN/Money senior writer

story.google.afp.jpg
More than 45 percent of all web searches are done on Google, ratings analysts say.

YOUR E-MAIL ALERTS

Google Inc.
Analysis
Yahoo! Incorporated
Earnings

NEW YORK -- It looks like Google lived up to the lofty expectations that analysts and investors had for the online search leader.

Google, thanks to extremely ebullient demand for keyword search advertising, reported that third-quarter sales nearly doubled from a year ago to $1.58 billion. And revenues, excluding sales that Google shares with partners -- known as traffic acquisition costs or TAC -- came in at $1.05 billion, well ahead of consensus estimates of $943 million.

The company reported a more than seven-fold increase in net income from a year ago, to $381 million, or $1.32 a share. And earnings per share, excluding charges such as stock compensation costs, were $1.51 a share, up from 70 cents a share a year ago and surpassing analysts' forecasts of $1.36 a share.

Google reported the so-called "pro-forma" number, which backs out certain costs and one-time gains, in addition to its net income on a generally accepted accounting principles (GAAP) basis this quarter in order to avoid some of the confusion that had taken place following prior Google earnings releases.

Often it was not clear until the company's conference call if Google had beat, met or missed earnings estimates since analysts were using pro-forma numbers in their estimates.

There was no such confusion this time around. Investors clearly loved the numbers.

"People continue to find more and more to like about Google," said David Garrity, director of research with Investec U.S. "In a word: Wow."

Defying a seasonal slowdown Google's shares have surged more than 250 percent since the company went public in August 2004.

So it goes without saying that there has been considerable pressure on the company to not just meet earnings estimates but beat them by a convincing margin.

"Nobody really believes that the consensus is what the company is being measured by at this point. It's some other number," said Scott Kessler, an equity analyst with Standard & Poor's, before Google's results were released on Thursday.

'Exceptional quarter'

It appears that Google delivered. The results were also a pleasant surprise since Google told Wall Street when it reported its second quarter results in July that investors should expect the company to be subject to the typical slowdown in Internet usage and online advertising during the sleepy summer months of the third quarter. Google obviously overcame this, however.

"Although this is typically a slower season for Internet properties, we had another exceptional quarter," said Eric Schmidt, Google chief executive officer in a written statement.

Some analysts also had expressed concerns about how robust earnings growth could be for Google since it has increased its spending lately as it launches new products.

The company is currently testing a Google instant messaging service called Google Talk as well as a video search offering. To that end, the company reported a 165 percent increase in research and development expenses from a year ago.

Google also reported a 127 percent increase in general and administrative costs, due largely to an increase in hiring. The company said it had nearly 5000 employees at the end of September, up from about 4200 at the end of June.

In addition, Google explicitly said in a filing for its recent secondary offering that it expected its sales growth rate to decline over time and that its operating margins would come under pressure as well.

But during a conference call with analysts, Schmidt said that strong gains in online advertising, which accounts for nearly all of the company's revenues, offset the increased expenses and seasonal slowdown in Web traffic, adding that Google saw a pickup in adverting from larger Fortune 500 companies as well as smaller businesses.

Google's results come on the heels of a similarly strong third-quarter report from its top rival Yahoo! on Tuesday. Yahoo! reported better than expected third quarter sales and earnings and lifted its sales guidance for the fourth quarter.

Google, as it has done since going public, declined to give guidance. It seems safe to say though that analysts will likely raise their fourth-quarter targets due to the better than expected third quarter results.

Currently, analysts are predicting that Google will report sales, excluding TAC, of $1.11 billion and pro-forma earnings per share of $1.60.

Future price

Investec's Garrity said that earnings estimates for 2006 are likely to increase as well. He said he would not be surprised to see 2006 estimates, currently at $7.34 a share, to move up to between $7.50 and $7.75 a share following the strong third-quarter results.

With that in mind, he said the stock, currently trading at about 41 times 2006 estimates, is not unreasonably priced considering that earnings could easily increase by about 40 percent next year.

One fund manager that owns Google agreed that investors have no reason to worry about the price just yet either since its performance justifies the premium valuation.

"In our tech funds, where we want to own the best growth companies, we are going to continue to own Google until it is dramatically overvalued or momentum slows," said Allison Thacker, co-manager of the RS Internet Age and RS Information Age funds, which both own Google.

During the call, analysts asked Google about plans for the future.

Although the company is wildly successful in its core business of search -- according to data from Nielsen/NetRatings, more than 45 percent of all Web searches were done on Google, compared to just 23 percent on Yahoo! and 12 percent on Microsoft's MSN -- some analysts have expressed concerns about Google's dependence on search-based advertising and the fact that competition is likely to increase from Yahoo! and MSN.

"Every quarter you think maybe Google's performance is peaking," said Thacker. "But it is clear that they are still gaining market share. It is pretty amazing."

Story Tools
Click Here to try 4 Free Trial Issues of Time! cover
Top Stories
Get up-to-the minute news from CNN
CNN.com gives you the latest stories and video from the around the world, with in-depth coverage of U.S. news, politics, entertainment, health, crime, tech and more.
Top Stories
Get up-to-the minute news from CNN
CNN.com gives you the latest stories and video from the around the world, with in-depth coverage of U.S. news, politics, entertainment, health, crime, tech and more.
CNN U.S.
CNN TV E-mail Services CNN Mobile CNNAvantGo Ad Info About Us Preferences
Search
© 2007 Cable News Network LP, LLLP.
A Time Warner Company. All Rights Reserved.
Terms under which this service is provided to you.
Read our privacy guidelines. Contact us. Site Map.
Offsite Icon External sites open in new window; not endorsed by CNN.com
Pipeline Icon Pay service with live and archived video. Learn more
Radio News Icon Download audio news  |  RSS Feed Add RSS headlines