042106: Google results outpace estimates, shares jump 8%

Google results outpace estimates, shares jump 8%

April 21, 2006
Updated 09:03am (Mla time)
Eric Auchard
Reuters

SAN FRANCISCO -- Web search leader Google Inc. on Wednesday returned to form by beating Wall Street expectations with a 79-percent jump in revenue tied to taking market share gains from rivals such as Yahoo Inc.

Google, recovering from a series of recent stumbles, saw its shares jump 8 percent after it reported net income of 592 million dollars, or 1.95 dollars per diluted share, up 60 percent from the year-earlier quarter's 372 million dollars, or 1.29 dollars per share.

Spectacular gains in the stock occurred after its initial public offering in 2004, based on a track record of outpacing Wall Street forecasts. But weak growth in Britain late last year led to its first disappointing quarter and shares fell.

Revenue rose to 2.25 billion dollars -- slightly above Wall Street forecasts, which ranged from 2.05 billion to 2.24 billion dollars, according to Reuters Estimates. Revenue included 723 million dollars in traffic acquisition costs, the cut affiliated Web sites take for running Google advertising on their own sites.

"We know that we gained [market] share on an absolute basis," Chief Executive Eric Schmidt said in a telephone interview. "It looks like we gained share faster than all others," he said of industry research figures for the US search market.

"Net revenue is very solid," said Martin Pyykkonen, an analyst at Hoefer & Arnett. "It's also proof Google continues to gain market share on Yahoo on paid search."

"They're still spending pretty heftily on marketing expenses but strategically it's the right thing to do and the underlying reason why revenue growth was so strong."

Excluding one-time items, the Mountain View, California-based company reported a profit of 2.29 dollars a share.

The first-quarter net profit includes charges of 115 million dollars for stock-based compensation, and to cover legal fees of 30 million dollars to settle a lawsuit that concerned the abuse of Google's pay-per-click advertising system by outside parties. These were partly offset by tax benefits of 39 million dollars.

Excluding one-time items and stock-based compensation, Wall Street analysts were looking for a consensus profit of 1.98 dollars per share. Including these items, net profit, on average, was expected to be 1.73 dollars a share, according to Reuters Estimates.

Shares of Google, the world's largest Web search supplier, jumped to 448.31 dollars in after-hours trade, adding to a 1.1-percent gain in regular trading on Nasdaq ahead of the report.

Schmidt reiterated that the second and third quarters traditionally grow slower than its first and fourth periods.

He also said the company is making progress in diversifying its base of revenue beyond pay-per-click advertising that now accounts for around 97 percent of revenue.

Radio advertising is set to "explode," he said, and the company plans to expand its a program in Japan to deliver text ads to mobile phone users around the world. Local advertising, the biggest potential market, will take longer to develop.

Goldman Sachs analyst Anthony Noto said in a preliminary note to clients that Google's results imply his forecast for 53-percent 2006 revenue growth "may be too conservative." Analysts, on average, predict 56-percent growth in 2006.

"[Estimates] will likely go higher based on first quarter outperformance versus expectations but may be partially offset by higher capex, [capital expenditure] which is now expected to grow materially faster than [revenue]," he said.

During the first quarter, Google spent 345 million dollars on computers and real estate. For 2005 as a whole, Google spent 838 million dollars, up 163 percent from 319 million dollars in 2004.

Noto said his profit forecasts support a valuation of between 515 and 530 dollars a share.

Google's share price suffered a dramatic fall three months ago when it missed Wall Street profit targets for the first time. The stock dropped to a low of nearly 330 dollars last month.

In recent weeks, however, investor sentiment has recovered and the stock was trading at roughly break-even for the year ahead of the quarterly results. Following the results, it is nearly 8 percent up year-to date. It had hit a peak in January of nearly 472 dollars.

Google had 49 percent of US searches conducted on its sites, according to recent data from Internet measurement firm Nielsen//NetRatings. Yahoo! remained in second place with 22.5 percent, while MSN ranked third with 10.9 percent.

Globally, Google's share of Web search is estimated by comScore Networks and Piper Jaffray to be above 60 percent.

 

Additional reporting by Michael Kahn in San Francisco, and Sue Zeidler and Gina Keating in Los Angeles

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