Google's First Report Is a Goodie

By Ben Elgin With Google's shares climbing 75%, to $150 since its August initial public offering, a growing chorus of observers has decried the stock as overpriced. But on Oct. 21, Google (GOOG) may have temporarily silenced the skeptics with its blistering third-quarter results.

The search kingpin notched net revenues of $503 million, doubling its year-ago total for the same period and easily beat analysts' expectations. Google's net income of $125 million, excluding one-time items, also outran estimates and topped its year-ago quarter by 500%. Without the nonrecurring charges -- primarily a legal settlement with Yahoo! (YHOO) pertaining to patents and stock warrants -- Google posted net income of $52 million.

In after-hours trading on Oct. 21, shares climbed 8% to $161. "We're very pleased with our performance," says chief executive Eric Schmidt. Investors were pleased, too. The stock was up almost 12%, to $167 on the 22nd.

"INCREASED MINDSHARE." A deeper look into Google's results shows additional positive trends. Foremost, the search company's efforts to cash in on its overseas visitors appear to be working. International sales accounted for 35% of the total, up from 31% in the prior quarter. That tops key competitor Yahoo, which derived about 23% of its third-quarter sales from international markets.

In addition, despite stepped up search competition from Yahoo and Microsoft (MSFT), Google appears to be gaining market share. According to researcher eMarketer, Google owns about 50% of the $3.9 billion U.S. market for search advertising -- up from 40% in 2003. And it has gone from handling 41% of U.S. Internet searches in March to 49% in October, according to analytics firm WebSideStory. "One of the ancillary benefits of Google's IPO has been increased mindshare," says David Hallerman, senior analyst at eMarketer.

Still, Google faces plenty of long-term challenges. Primarily, it has yet to significantly diversify its sales beyond search-based ads. While Yahoo boasts other moneymaking businesses, such as so-called display ads that appear throughout its site and subscription-based online personals, Google remains a one-trick pony.

PROFIT POTENTIAL? Sure, search ads have experienced rocket-like growth. But analysts expect this market to begin decelerating. eMarketer, for instance, predicts search-ad growth in the U.S. will slow from 55% this year to 19% in 2005.

This challenge isn't lost on Google. It has been rolling out new products, such as its Gmail e-mail service and software for searching contents of individuals' computers. While promising, these have yet to show serious profit potential. But as long as Google churns out such stellar financial results, these long-range concerns may be overlooked. Elgin is a correspondent in BusinessWeek's Silicon Valley bureau

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