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Google posts sevenfold increase in 4Q profits

/ Source: The Associated Press

Google Inc.’s fourth-quarter profit surged to a sevenfold increase, accelerating the financial gains that have quickly turned the online search engine leader into a Wall Street favorite.

The Mountain View-based company said Tuesday that it earned $204.1 million, or 71 cents per share, during the final three months of 2004. That compared to net income of $27.3 million, or 10 cents per share, at the same time in 2003.

Revenue for the period totaled $1.03 billion, more than doubling from $512.2 million in the prior year. After subtracting commissions paid to other Web sites in its advertising network, Google’s fourth-quarter revenue worked out to $653.5 million, more than doubling from a comparable figure of $296 million in the previous year.

If not for a $60 million charge to cover stock compensation paid to its employees, Google would have earned 92 cents per share, unadjusted from income taxes. That figure exceeded the mean estimate of 77 cents per share among analysts surveyed by Thomson First Call. It marked the second consecutive quarter that Google has blown by analysts’ earnings estimates since the company’s closely watched initial public offering of stock nearly six months ago.

The company released the results after the stock market closed. Google’s shares fell $3.72 to close at $191.90 on the Nasdaq Stock Market, then climbed by $16.90, or 8.8 percent, in extended trading. The shares have reached a high of $205.30 since Google’s IPO, which was priced at $85.

Lucrative ad system
Google is getting rich off a system that requires advertisers to bid for the right to have their Web links displayed alongside search results. The advertisers pay Google and its partners, which include AOL and Ask Jeeves Inc., whenever visitors click on the commercial links.

“The model that we have built over the years is working very, very well right now,” Google CEO Eric Schmidt said during an interview Tuesday.

Google’s stock has emerged as one of the nation’s priciest because investors are betting the company’s iconic search engine will continue to attract hordes of advertisers, producing breakneck earnings growth.

Although Google co-founders Sergey Brin and Larry Page have warned they might make decisions that weaken short-term earnings, Wall Street’s high expectations mean the company must handily beat analyst estimates or risk a sharp drop in its high-flying stock.

Based on Tuesday’s closing stock price, Google’s market value stood at $55 billion — more than General Motors Corp. and Ford Motor Co. combined. Google’s stock carries a price-to-earnings ratio of nearly 230, an extremely high multiple for a measure that is widely used to appraise a company’s value. By comparison, other well-known — and older — Internet companies such as Yahoo Inc., Inc. and eBay Inc. have price-to-earnings multiples ranging between 58 and 68.

Signs of growth
In a telling sign of how quickly Google’s business is growing, the company’s fourth-quarter revenue rose 28 percent from the third quarter. Investors are focusing on Google’s sequential quarterly growth for signs of a sales slowdown — something that hasn’t cropped up yet. Google’s growth curve is outstripping Yahoo’s — the rival to which it is most often compared. Yahoo’s fourth-quarter revenue increased 19 percent from the third-quarter.

In another bullish sign, Google generated 51 percent — $530 million — of its fourth-quarter revenue from its own Web sites. Advertising on its own sites is more valuable to Google because it doesn’t have to share the money with its business partners.

Google’s success concept has intensified the competition from Yahoo, software giant Microsoft Inc. and a host of smaller companies that have introduced rival products. Google has maintained its leadership, although Yahoo has narrowed the gap since unveiling its own search technology nearly a year ago. Microsoft is stepping up its threat with a multimedia advertising blitz to promote a new search engine on its MSN site.

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Although Google’s management steadfastly refuses to project future earnings, the company seems confident about its future. Google continued its hiring spree of the past two years, adding 353 more employees during the final three months of the year to boost its payroll to 3,021 workers as of Dec. 31. That’s nearly five times more people than Google employed at the end of 2002.

Hoping to lure even more employees, Brin told analysts that the company is distributing big baskets of restricted stock to workers who develop promising technology. Google recently awarded a total of $12 million in stock to two different development teams under the new “Founder’s Award” program.

Google management also emphasized the company will continue to invest heavily in developing new technology — a commitment that theoretically could depress earnings and drag down the stock. The company spent $87.4 million on research and development in the fourth quarter, nearly tripling from $28.5 million in the previous year. Google ended 2004 with $2.13 billion in cash.

Google’s investments already have produced a raft of new products as part of an effort to make the company less dependent on ad revenue from its search engine. During the past year, Google’s diversification has included: free e-mail with so much storage that competitors quickly responded by upgrading their offerings; a tool for searching computer hard drives; and an ambitious project to index millions of books in its search engine.

For all of 2004, Google earned $399.1 million, or $1.46 per share, on revenue of $3.19 billion, In 2003, the company earned $105.6 million, or 41 cents per share, on revenue of $1.47 billion.