April 21, 2005

After the closing bell, Google reported very strong first quarter earnings that largely exceeded even the most optimistic Street analysts' predictions.

The company reported a nearly six-fold increase in net income and pro-forma earnings, excluding various charges, that were substantially higher than consensus estimates.

Sales, excluding advertising fees that Google shares with partners (known in the industry as traffic acquisition costs or TAC) came in at $794 million, well above Wall Street's forecast of $731 million. In fact, the highest estimate on the Street was $767 million.

Google's news is further evidence that fears of a slowdown in online advertising earlier this year were way overdone. Google rival Yahoo! (Research) issued a strong first quarter report on Tuesday and issued bullish guidance for the second quarter and remainder of the year.

"These are extremely strong results. There is nothing to quibble with," said Marianne Wolk, an analyst with Susquehanna Financial Group.

Shares of Google (Research) gained more than 3 percent in regular trading on the Nasdaq Thursday closing above the $200 level for the first time since early February when Google announced better than expected fourth quarter results.

The stock surged more than 6 percent after hours, according to INET. Based on after-hours prices, Google appears set to open near its all-time high. The company's stock has skyrocketed more than 140 percent since going public in August.

Google's results show that despite tough competition, the online advertising business is still booming. Google and Yahoo! have been locked in a fierce battle for Web users and the two are constantly rolling out new features to attract users, and advertisers.

To that end, Google unveiled a new feature that allows people to browse an archive of prior searches on Thursday. Also on Thursday, Yahoo! announced that it formed a partnership with retailer Target (Research) to form a co-branded web site for storing digital photos.

"The way I look at Google is that they are riding a wave and simply stated, the wave is keyword advertising," said Scott Kessler, an equity analyst with Standard & Poor's.

During a conference call with analysts, Google CEO Eric Schmidt said that the company would continue its practice of not giving guidance to Wall Street.

But given that Google beat Wall Street's estimates by such a substantial amount in the first quarter, it seems safe to say that second quarter consensus estimates should head higher in the next few days.

Analysts are currently predicting that Google will earn a pro-forma profit of 93 cents per share, up from 58 cents in pro-forma earnings during the same period last year, according to Thomson/First Call. Sales, excluding TAC, are expected to be $768 million, compared to revenues of $423 million a year ago.

"2005 is off to a very healthy start," said Google chief financial officer George Reyes during the conference call, adding that the strength is mainly due to increased traffic on Google sites. In addition, he said that there is no reason why Google would not at least track the growth rates seen in the rest of the online ad industry.

But Google appears to be growing at a more rapid pace than its competitors. The company's revenues, excluding TAC, increased 21 percent from the fourth quarter of 2004. Yahoo!'s sales, by way of comparison, were up just 4.6 percent on a sequential basis in the first quarter.

Reyes said during the conference call that international revenues are becoming an increasingly important part of Google's overall sales, with international operations accounting for 39 percent of total sales, up from 35 percent in the fourth quarter.

As such, Susquehanna's Wolk said that Google's success abroad is a key reason why she thinks the company can continue to post results that outpace the rest of the industry.

"Google is the stronger play on the exceptional growth that search is seeing overseas," she said.

Executives added during the call that the company expected to continue to invest in new products and that it was not planning a stock buyback anytime soon, as many other techs have done. Yahoo!, for example, recently announced a plan to repurchase as much as $3 billion's worth oft its shares over the next five years.

Google finished the first quarter with $2.5 billion in cash, up from $2.1 billion at the end of December.

But David Garrity, an analyst with Caris & Co., thinks that the fact that Google is not interested in a stock buyback, could be a sign that Google is gearing up for big acquisitions.

Analysts quoted in this story do not own shares of Google and their firms have no investment banking relationships with the companies.

Source: CNN Money

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