Google Blows by Targets, Expected to Gain on Rivals

Google reprised its role as Wall Street darling Thursday, releasing second-quarter earnings that showed strong revenue and profit growth, beating forecast targets and apparently widening the gap between itself and its main rivals.

The company posted earnings of US$772 million, or $2.49 per share, on revenue of $2.46 billion, outpacing analyst consensus forecasts. Income nearly doubled over 2005 levels, while revenue was up 77 percent on a year-over-year basis.

Exceeding expectations has become a regular habit for Google, which has beat targets seven out of the eight times it has reported earnings as a public company since its August, 2004 IPO.

“It’s another good day and good quarter for Google,” CEO Eric Schmidt said in a conference call. Noting opportunities such as mobile search and ads, he added that Google sees “no limit” to the scope of its vision. “The opportunities before us really are unlimited at this point.”

The results came in sharp contrast to the earlier announcement from rival Yahoo, which disappointed investors with its results, its outlook and word that its own ad-delivery platform would be delayed and not launch later this summer as previously expected.

Calling All Partners

Google said revenue from its own sites — those bearing the Google brand — was $1.43 billion, or about 58 percent of all revenues and a 94 percent increase over the year before period. Revenue from partner sites in the Google network, which includes those that publish ads served by Google, was $997 million, also up 58 percent.

Google co-founder Sergey Brin noted the launch of Google Checkout during the end of the quarter has already resulted in “positive feedback from consumers” and strong adoption among merchants.

In the conference call, Schmidt said the “evolution of Google’s strategy” was apparent from its results as well as new initiatives and partnerships.

Working with partners — Schmidt cited the distribution of its toolbars through Dell as an example — is critical to the company’s long-term strategy, he said, “because we can’t do it alone.”

Google said it would increase the rate at which it invests in growing its business, with a heavy focus on additional IT infrastructure such as server farms, networking equipment as well as more real estate to accommodate the company’s fast-growing employee base, which ended the quarter at 7,942 workers, up more than 1,100 over the course of the quarter alone.

In keeping with its practice, Google did not offer any forward-looking guidance for the coming quarter or the full year.

Picking It Up

The results went a long way towards revising analysts’ thinking about the overall health of the search industry. Yahoo’s results, while in line with expectations when released earlier in the week, had sparked some discussion that the search marketplace had peaked. Google’s earnings seemed to dash that scenario.

“Google’s results were intrinsically strong, indicating a still robust search market, market share gains and solid execution,” Citigroup analyst Mark Mahaney wrote in a research note.

Other analysts were equally upbeat, with one firm raising its one-year price target on Google shares to $500.

Many are now expecting Google to continue to extend its lead over Yahoo as that company’s Panama ad system will now be fully operational early in 2007 rather than this year.

According to data from Nielsen//NetRatings, Google saw its overall traffic grow 25 percent in the second quarter compared to a year ago, making it the fastest-growing of the top five Web properties. In contrast, Microsoft grew traffic by 6 percent — though it remained the largest parent company in terms of Web visits — and Yahoo 9 percent.

The research firm also said Google grew the number of searches it handled by 34 percent to 2.8 billion searches in May of 2006, with the company leading in the Web search, local search, picture search and news search categories.

“Google continues to be the master of the core search domain,” said Greg Sterling, principal analyst with Sterling Market Intelligence. Longer-range plans to branch out into more areas, such as video and the e-commerce space through Google Checkout, are still coming together and Google’s search strength means they have time to develop further. “There’s no emergency for those initiatives to pay off just yet.”