Google misses earnings expectations

Search maverick Google missed widely on Wall Street's earnings expectations for the quarter ended Sept. 30, 2004, its first quarterly financial report after launching its initial public offering.

Net income came in at US$52 million, or US$0.19 per share, compared with US$20.4 million, or US$0.08 per share, in 2003's third quarter. Net income before certain non-recurring items was US$125 million or US$0.45 per share, significantly below the US$0.56 per share consensus expectation from analysts polled by Thomson First Call.

Google reported Thursday US$805.9 million in revenue in 2004's third quarter, an increase of 105 percent over the same quarter last year. Excluding traffic acquisition costs (TACs), which is revenue Google pays to its partners, revenue came in at US$503 million, exceeding analysts' expectation of US$456 million.

Google's stock (GOOG) started trading on Aug. 19 on the Nasdaq Exchange. Since then, the lowest price for the stock has been US$95.96 and the highest US$152.40. Its IPO price was US$85.

Google, based in Mountain View, California, and founded in 1998, generates most of its revenue from selling online ads that it serves up on its site and on the sites of companies in its ad network. The text ads are matched via relevant keywords to the content of pages or to search engine queries, so that an ad for basketballs would be tied to a page that mentions the term and would appear alongside relevant search results. These ads are commonly referred to as sponsored search ads.

Google, which gained prominence as the most widely used Internet search engine, has been expanding its reach both inside and outside the search market. In the search market, Google has launched special services and products, such as its recently announced desktop search application, its intranet search appliance, its Froogle comparison shopping service and Google Local service for narrowing Internet searches to a geographic area.

Google is also actively reaching outside the search space. In July, it bought Picasa, which makes software for organizing and managing digital photos and runs a peer-to-peer network for sharing digital photos. In April, it announced a Web mail service called Gmail, which is still in test mode. Last year, it acquired the Blogger Web log service when it bought Pyra Labs. Recently, rumors have swirled that Google might be developing a Web browser and an instant messaging service.

Industry observers have pointed out that Google needs to broaden its scope to diversify its revenue stream and be in a better position to compete against rivals such as Yahoo, America Online and Microsoft. All three are moving aggressively to increase their share of the fast-growing and profitable sponsored search space.

In the second quarter, overall Internet ad spending was about US$2.37 billion, a 42.7 percent increase over same period in 2003, according to a report issued in September by the Internet Advertising Bureau and Pricewaterhousecoopers LLP. Search-related ads were the largest category with US$947 million, according to the report. Display ads followed in a distant second place with US$474 million. Classifieds came in third with US$403 million.

Although AOL uses Google technology to power its own Internet search service, Yahoo uses its own technology and Microsoft is developing its own technology as well. At the same time, AOL, Microsoft and Yahoo have online offerings that Google doesn't have, such as instant messaging services, and have had other online offerings longer than Google, such as Web mail services.

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Juan Carlos Perez

IDG News Service
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