Google gets its groove back

World's top search engine reports strong increase in sales and profits that beat expectations; stock soars.

By Paul R. La Monica, editor at large

NEW YORK ( -- Google said Thursday that profit soared nearly 70 percent in the first quarter on the back of solid sales growth, allowing the world's No. 1 search engine to keep its dominant spot in the red-hot online advertising business.

Shares of Google (Charts, Fortune 500) jumped 3.8 percent in early trading Friday on Nasdaq.

Google Chairman and CEO Eric Schmidt
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Google reported revenue of $3.66 billion, up 63 percent from a year earlier. After backing out advertising sales that Google shares with affiliates, the company reported revenue of $2.53 billion, better than Wall Street's consensus estimate of $2.49 billion and up 66 percent from $1.53 billion last year.

The Mountain View, Calif.-based company's net income surged 69 percent from the same period last year to $1 billion, or $3.18 a share. Excluding stock-based compensation as well as a tax benefit and other items, the company reported a profit of $3.68 a share, ahead of the $3.30 a share that analysts were expecting on this basis.

Google's first-quarter results came two days after top rival Yahoo! (Charts, Fortune 500) posted disappointing first-quarter earnings and issued weaker-than-forecast sales guidance for the second quarter, news that caused Yahoo's stock to plunge 12 percent Wednesday and another 3 percent Thursday.

Shares of Google have underperformed Yahoo this year as investors bet that Yahoo was going to gain market share thanks to its new search platform, called Project Panama, which is said to be leading to more relevant search results on Yahoo.

But earlier this week, research from comScore showed that Google widened its market share lead in search over Yahoo and smaller competitors such as Microsoft's (Charts, Fortune 500) MSN and IAC's (Charts, Fortune 500)

Youssef Squali, an analyst with Jefferies & Co., said Yahoo may eventually be able to narrow the gap between it and Google in search, but it's clearly not happening yet.

"Google's report was pretty strong throughout," said Squali. "Panama is not having a short-term impact and Google's performance this quarter attests to that."

In addition to cementing its leading position in search, analysts have speculated that Google may also become a more significant player in other areas of advertising. The company acquired popular online video site YouTube last year.

And in a flurry of activity this month, Google agreed to buy DoubleClick, a firm that specializes in placing online banner ads, last week for $3.1 billion, and also announced new ad-selling partnerships with radio station owner Clear Channel Communications (Charts, Fortune 500) and EchoStar (Charts, Fortune 500), which operates the DISH satellite TV network.

"The global growth of our core search and ads business and our focus on building our partnerships drove our strong results in the quarter," Google CEO Eric Schmidt said in a statement. "We continued to expand our worldwide footprint, adding important new partners and growing our platform to increase our ability to deliver targeted and measurable ads."

During the quarter, Google reported revenue from outside the U.S. nearly doubled from the same period last year and accounted for 47 percent of the company's total revenue.

One analyst noted that further international growth will be key to Google's success.

"Clearly, Google's ability to take more share of global search queries and improve click-though rates, especially in faster growing international markets, is going to drive results for the foreseeable future," said Stewart Barry, an analyst with ThinkEquity Partners.

Speaking during a conference call with analysts Thursday afternoon, Schmidt said Google was "ecstatic" about the company's results but warned investors that the second quarter and third quarter, which encompass the summer months, tend to be seasonally slower for Internet traffic and online advertising.

Google does not give sales or earnings guidance. Analysts currently expect the company to report revenue, excluding the ad sales shared with partners, of $2.63 billion in the second quarter, up 58 percent from last year.

Earnings, backing out charges and tax gains, are forecast to come in at $3.42 a share, a 37 percent increase from the second quarter of 2006.

Schmidt added during the call that Google's strength is mainly coming from its core search business but he indicated that other segments, such as YouTube, were also performing well.

Schmidt did not discuss, nor was he specifically asked about, a $1 billion copyright infringement lawsuit filed against Google and YouTube by media conglomerate Viacom last month. But Schmidt did say Google is working on a tool that will let media companies automate the process of asking Google and YouTube to remove copyrighted content.

Google indicated yet again, as it has on previous earnings calls, that it plans to spend aggressively on building its business.

Chief financial officer George Reyes said Google spent nearly $600 million on things like servers, data centers and networking equipment in the first quarter.

Google is also spending heavily on hiring new employees. The company said it finished the first quarter with 12,238 full-time employees, up from 10,674 full time employees at the end of 2006.

During the conference call, Goldman Sachs analyst Anthony Noto asked Google if the company thought it was nearing a point where it had enough employees and whether it was worried that revenue per employee was actually declining as Google's headcount increased.

Schmidt brushed off those concerns and said Google does not really look at its revenue in this manner. He added that Google was more focused on creating new products that would get more users to come to Google, even though the new features may not directly lead to increased revenue in the short term.

Google finished the quarter with $11.9 billion in cash, up from $11.2 billion at the end of 2006.

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