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Google Shares Keep Rising on Strong Earnings

Reuters
Friday, 19 Oct 2007 | 10:58 AM ET

Less than two weeks after its stock price smashed through $600 for the first time, Google showed why it might not be long before the Internet search leader's shares are flirting with $700.

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Net income rose to $1.07 billion, or $3.38 per diluted share, compared with the year-earlier quarter's $733.3 million, or $2.36 per diluted share. Excluding one-time items, profit was $3.91 per share in the latest quarter, versus the Wall Street average target of $3.77, according to Reuters Estimates.

Google shares gained $7.01, or 1.10 percent, at $646.63 in Friday trade on the Nasdaq.

If not for the cost of awarding stock to its steadily expanding work force, Google said it would have earned $3.91 per share. That topped the average estimate of $3.78 per share among analysts surveyed by Thomson Financial.

Revenue for the period totaled $4.23 billion, a 57 percent increase from $2.69 billion last year.

The third-quarter results, released Thursday, surpassed analyst expectations and demonstrated why Google has emerged as Silicon Valley's most prized company with a market value of about $200 billion after just nine years in business.

"We're strong and getting stronger," Google Chairman Eric Schmidt said in an interview Thursday. "What I am most pleased about is our model works."

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The healthy boost put the Mountain View-based company's market value slightly ahead of Cisco Systems in Silicon Valley's pecking order.

Microsoft, which started when Google co-founders Larry Page and Sergey Brin were still toddlers, is now the only high-tech company worth more than the Internet search leader.

Google Q3 Earnings
Google's Q3 results blow right past Wall Street expectations, and Shawn Baldwin, Capital Mgmt. Group CEO, and CNBC's Erin Burnett discuss the numbers.

As it has been for several years, Google reaped the benefits of running the Internet's most popular advertising network as more marketing dollars shift to the Web from television, radio, newspapers and magazines.

Meanwhile, long-established media are suffering. For instance, third-quarter advertising revenue at three major newspaper publishers -- Gannett, McClatchy and Dow Jones -- declined by a combined $125 million, or 6 percent, from the same period last year.

Chris Winfield, who runs the search engine ad firm 10e20, says Google has become the Internet's equivalent of the Beatles during that rock group's heyday in the 1960s. "It's pretty amazing. It's almost like they are in control of the world."

After subtracting commissions paid to its thousands of advertising partners, Google's revenue stood at $3.01 billion -- about $70 million above the average analyst estimate.

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The performance represented a return to form for Google after its second-quarter earnings disappointed Wall Street. The company has surpassed analyst estimates in all but two of the 13 quarters since its August 2004 initial public offering. As a result, Google's stock price has increased more than sevenfold since the IPO.

Although it relies on complex technology, Google's business formula is fairly simple. As it processes a search request, Google also scans its database for text-based ads related to the same topic as the query and displays the commercial messages along the side and top of the results page.

Google gets paid when someone clicks on an ad on its pages or on one of its partners' sites.

There's ample opportunity to display ads, with Google fielding about 1.2 billion search requests worldwide per day, based on the latest data from comScore. That's more than quadruple the number of requests handled by Yahoo, which runs the second-largest search engine.

"The Google machine continues to run pretty smooth," said Cantor Fitzgerald analyst Derek Brown. Like many analysts, Brown is trying to figure out just high Google's stock can go. Brown set a $650 price target for the shares last December when they were still hovering around $460.

While becoming even more dominant in search, Google also is branching in new directions that are creating new ways to sell ads and opening up potential new revenue channels in the software applications market.

In the past few months, Google unveiled a way to show text-based ads across the bottom of videos supplied by its YouTube subsidiary and also began distributing ads within "widgets" -- the interactive capsules that are becoming Internet staples.

In a sign of its ambitious expansion plans, Google added another 2,130 employees in the third quarter -- more than in any three-month period in its history. Management said the summer additions included about 1,000 hires right out of college and 300 employees inherited in its $625 million acquisition of e-mail specialist Postini.

Schmidt assured analysts that Google is closely monitoring the size of its work force and indicated the hiring will be more modest in the current quarter.

As of Sept. 30, the company's payroll totaled 15,916 people, including hundreds who have become millionaires.

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