Google’s Profit Soars on Strong Ad Sales
Google Inc. said Tuesday that profit soared nearly eightfold as it wrung more money out of advertisers in the fourth quarter.
Google shares jumped nearly 10% to a record $210.30 -- 147% above the initial public offering price of $85 in August.
Mountain View, Calif.-based Google reported a fourth-quarter profit of $204 million, or 71 cents a share, compared with $27 million, or 10 cents, in the same quarter of 2003, when it was closely held. Sales doubled to $1 billion and surpassed even the most bullish analysts’ predictions for the quarter, Google’s second since its IPO.
For the full year, profit was $399 million, compared with $106 million in 2003. Revenue doubled to $3.2 billion, with half coming from ads on Google websites and half from ads on the websites of partners such as Time Warner Inc.’s America Online.
The company said it had attracted more people to its stable of websites and was getting better at making sure they saw tempting ads. Google’s text-based ads generate revenue only when users click on them.
“This is the second quarter in a row that analysts have dramatically underestimated the company,” said Scott Kessler, an analyst at Standard & Poor’s. “They’re executing in a way that I don’t think most people would have imagined.”
Excluding the money Google shared with website operators that ran targeted ads, the company’s sales were $654 million. That was $61 million more than the consensus expectation of 19 analysts polled by Thomson First Call and $28 million more than the top forecast.
Because the company is growing fast and its executives won’t issue revenue or profit forecasts, financial results are especially hard to predict.
Google shares, which fell $3.72 to $191.90 in regular Nasdaq trading, shot up after hours after the earnings announcement.
“It’s obvious to me we are benefiting from the shift of less targeted [advertising] to more targeted,” Google Chief Executive Eric Schmidt said. “We are a small player in a very big market.”
That market is rapidly expanding, and competitors such as Yahoo Inc. and Microsoft Corp. want to slow Google’s growth. To do that, they’re investing some of the cash generated by their other businesses to attack Google’s dominance in search engines.
Yahoo’s share of all Web searches in the United States crept up to 31.9% in December, from 27.1% a year earlier, according to market researcher ComScore Networks. Google fell slightly, to 34.7%.
As for Microsoft, it released its own search engine Tuesday and vowed to spend heavily on advertising -- including spots during the Super Bowl and the college basketball tournament -- to increase its search market share of 16.3%.
But Schmidt said Google wouldn’t abandon the approach of relying on word of mouth.
“We’ve not found a need to change the way we market our products or services,” he said.
RBC Capital Markets analyst Jordan Rohan said Google’s profit margins were on the rise thanks to growth overseas. “International markets are reaching critical mass, both of users and advertisers,” he said.
During a conference call with Google executives, analysts questioned the company’s strategy of giving away many products -- such as its photo-sharing service, Picasa -- without plastering them with ads or charging subscription fees.
They also expressed concern about the lack of diversity in Google’s revenue stream compared with competitors. Yahoo sells banner ads and Microsoft has a cash cow in its Windows operating system, but Google would have little to fall back on if the market for search-related advertising slowed dramatically.
“That’s a concern that’ll always be there,” said Youssef Squali, an analyst at Jefferies & Co. “The other side of the coin is that pure-plays always grow faster than diversified companies in the growth phase of an industry.”
