Google’s Earnings Dazzle Wall Street

Times Staff Writer

Posting first-quarter earnings that again confounded and delighted Wall Street, Google Inc. gave credence Thursday to the adage that you have to spend money to make money.

The company reported a 60% rise in profit that beat even the most cheery expectations of analysts, some of whom thought they had finally pegged the Internet search giant, which doesn’t offer financial guidance.

The profit would have been even higher if not for a new accounting rule requiring companies to list stock compensation as an expense. Net income for the three months ended March 31 was $592 million, or $1.95 a share, up from $369 million, or $1.29, a year earlier.

Revenue jumped 79% to $2.25 billion. Google executives said they planned to hire voraciously this year and increase capital spending substantially faster than revenue as they tackle new Web services and the broader advertising market.


“This is the time to invest,” Chief Executive Eric Schmidt said. “Business is strong. People want to work here. We have a lot of interesting ideas, not every one of which will work.”

Shares of Google rose $4.50 to $415 on Thursday, then jumped 8% in after-hours trading following the earnings release.

The stock gains show the heart-in-throat feeling of owning a stake in Google and other big Internet companies. In January, Google reported an 82% jump in fourth-quarter profit, but investors who had been expecting more sent shares into a tailspin. They fell 22% over the following six weeks before starting to recover.

“There has been a lot more concern that has crept into Google shares in the last three months than we have seen in quite a while,” said Pacific Growth Equities analyst Derek Brown, who owns Google stock. “Clearly some of it was misplaced.”


Said Schmidt: “We’ve said over and over again that we want investors to take the long term, that this is an early market. It’s very important that the company not believe it can control the stock price.”

Also Thursday, a judge in Arkansas approved a $90-million settlement between Google and a group of advertisers who accused the company in a class-action lawsuit of overcharging for search ads. Google agreed to pay as much as $60 million in credits for future Google ads and $30 million for lawyers’ fees in the “click fraud” case.

The consensus of 29 analysts polled by Thomson Financial was that Google would report earnings per share, excluding special charges, of $1.97.

Wrong again. After accounting for stock-based compensation and lawyer fees from the click fraud settlement, Google had a per-share profit of $2.29.

“The numbers were very, very strong, well ahead of anything we or the consensus were looking for,” said Marianne Wolk, an analyst for Susquehanna Financial Group. “The company saw a significant gain in share this quarter.”

Google continues to siphon a disproportionate share of the online advertising market. The Interactive Advertising Bureau said Thursday that 2005 online ad revenue rose 30% to $12.5 billion. During that same period, Google’s revenue soared 93%.

Google is putting much of that money toward its future. The company added 1,110 employees during the quarter, a 20% increase, and said it would spend heavily on servers, networking equipment, data centers and real estate.

“It really seems as if the company can’t spend money fast enough,” Brown said.