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Google generates dramatic profit growth, but eats into partners' income

Google's stock rose by almost 10% to $210 in late trading after the company reported Q4 results that beat analysts' estimates. Here are the key numbers from Google's results and some brief comments about the sources of Google's income:

  • Q4 EPS of $0.87 (pro-forma, excluding stock-based compensation) beat the consensus estimate of $0.77.
  • Revenue including traffic acquisition costs rose 101% to $1.1 billion from $512 million a year earlier.
  • Revenue excluding traffic acquisition costs ("net revenue) was $653 versus the consensus estimate of $590 million. Net revenue grew 32% quarter over quarter.
  • Google-owned sites generated 51% of total revenues, at $530 million, up 118% year over year.
  • Google's AdSense contextual advertising and partner search program genererated $490 million, accounting for 48% of total revenues and up 92% year over year. AOL Europe was added as a search partner in November.
  • Sequential growth rates: Google sites 29%, Google Network 28%.
  • Traffic acquisition costs on "the Google Network", namely the AdSense partner sites, fell to 77% of its revenues versus 85% a year earlier.
  • International revenues accounted for 34% of total revenues, up from 29% a year earlier.
  • 3021 full-time employees as of end-Q4 versus 2668 as of end-Q3.

Of note:

Google didn't reveal the metrics that would give the clearest picture of its business. Namely: traffic growth, pay-per-click (PPC) ad click rates, and PPC average pricing. On its conference call Google suggested that traffic growth and click rates were strong, but didn't put numbers to those claims. Would it hurt Google competitively to reveal these numbers? Probably not, as traffic to Google's site is measured by firms like comScore, and PPC ad prices are set independently in auction (advertisers bid for key words). What the numbers would tell us is how well Google's technology is working in matching ads to search results to generate clicks on PPC ads.

Google cut the proportion of revenue it pays to its AdSense partners
to 77% from 85% a year earlier. On its conference call, the company ascribed this to (a) strong performance from partners that Google makes fixed minimum payments to, and (b) strong performance from smaller partners that receive a lower share of revenue. That's fine, but at the end of the day it still means that Google increased the percentage of profits it takes from its partners. Will this generate the same hostility from partners as eBay's recent price rise? Or to put it another way: is that a sustainable source of growth?

Google's AdSense program performed spectacularly, generating almost as much revenue as its search business ($490 million versus $530 million) and growing at almost an identical rate sequentially (28% versus 29%). Google's AdSense program is actually two distinct businesses: partnerships where Google provides PPC ads for other companies' search, such as AOL Europe, Ask Jeeves, and Shopping.com; and Google's contextual advertising business for content  owners.  Comments on the conference call suggest that both of these businesses performed strongly.

That has two implications:

  1. Google's search partners did well during the quarter. Although AOL Europe was added as a new customer in November, this probably suggests that Ask Jeeves and Shopping.com performed well during the quarter. Both companies are yet to announce Q4 results.
  2. Google's contextual advertising business is growing strongly . AdSense is underappreciated by investors, since Google's competitive position in contextual advertising is arguably more secure than its position in search.

GOOG chart below.

Full disclosure: at the time of writing I'm long SHOP.

Posted by David Jackson on February 2, 2005 at 01:49 AM in Sub-sector: Search, ticker: GOOG | Permalink


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