Going Gangbusters at Google


By Sarah Lacy Score one for the bulls: Google has done it again. The Internet search kingpin reported another impressive quarter after the close of trading on Feb. 1, announcing profits for the last quarter of 2004 that were seven times higher than those of a year earlier. Although many analysts expected a banner fourth quarter, shareholders ate it up: Google's (GOOG) stock jumped 8.9%, to $209.03, in after-hours trading.

Google generated just north of $1 billion in revenues under generally accepted accounting principals. Subtracting fees from revenue-sharing agreements with other Web sites, it made $653.5 million, up 26.9% from $515 million a year ago and beating Wall Street expectations of $590 million.

Profits were the real eye-catcher. Google earned $204.1 million, compared to $27.3 million in the fourth quarter of 2003. Excluding a charge for employee stock options, it earned $264 million, well above Thompson First Call estimates of $221 million.

GLOBAL PUSH. Google execs emphasized in a call with investors that the company became more international in just its second quarter as a public company. International revenues were 35% of total sales vs. 29% a year ago.

Expect a greater international sales share in the year to come. In the fourth quarter, Google signed deals to place its search window on sites like AOL Europe, Ask Jeeves Japan (ASKJ), Shopping.com's (SHOP) British site, and others. And it's hiring engineers to staff research and development offices in India and Europe in order to tailor its services to local tastes.

Why the international push? It seems that Google is a bigger force outside of U.S. than it is inside. A recent comScore Media Metrix survey shows Google's non-U.S. market share at 58% in October, 2004 -- significantly higher than its 35% U.S. share.

A FORWARD LOOK? That helped boost Google's piece of the global search market from 43% to 48% throughout much of 2004, even though Google's U.S. share dropped slightly. International strength is very good sign of continued growth, says Mark Mahaney, analyst at American Technology Research. "As with other leading Internet companies like eBay (EBAY) and Amazon.com (AMZN), we believe this significant international exposure can be a substantial driver for top line growth," he wrote in a Jan. 31 pre-earnings report.

But investors shouldn't get too comfortable. On Feb. 9, Google will hold its first analyst day, and company watchers are hoping they'll get a window into the future of an outfit that so far has doggedly refused to give any forward-looking guidance.

Also, on Feb. 14, the last -- and biggest -- of Google's employee stock option "lock-ups" expires. That means insider shareholders are free to sell about $177 million in shares. Lock-up expirations typically push down on a stock price, because more supply is potentially coming into the market.

ONE-TRICK PONY? Add it up, and it means share-price volatility for the young company in 2005. Nothing new there, of course. In less then a year after its IPO, Google's stock has swung from a low of $95.96 to today's high of $209.03. After opening the year above $200, just last week it was trading as low as $176.29.

But once the lock-ups are behind Google, and it gets a few more quarters under its belt, volatility should ease, and investors will likely get a real sense of what's driving this Net leviathan and where it could run into trouble.

The biggest concern is that Google still derives about 98% of its revenue from paid search ads. When compared to Yahoo! (YHOO), which some say has the best diversification of paid search and branding advertising on the Web, that reliance makes investors nervous. Google's co-founder Larry Page highlighted several new products on the conference call -- including video search, local search, and the project to put content from the world's biggest libraries online. But few of those will translate into meaningful revenue anytime soon.

"BIG ISSUE." For now, being so reliant on paid search isn't bad, since ad rates were up 25% last year. CEO Eric Schmidt said on the call that Google has seen no signs of resistance to further hikes, at least among its biggest customers. But the durability of that upward trend is what worries analyst Martin Pyykkonen of Janco Partners. "If Eric is right, why be in anything but paid search? But if anything cracks, it'll be a big issue," says Pyykkonen.

Those are future worries, of course. For now, investors can revel in another bang-up quarter. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau


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