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Friday, April 22, 2005

Three take-aways from GOOG's blow-out quarter (1Q05 earnings)

Google (ticker: GOOG) blew away consensus revenue and earnings estimates, driving the stock up almost 10% in late trading. Details, plus three key take-aways:

Q1 Results
(all percentage changes and comparisons are year on year, unless stated otherwise)

  • EPS of $1.29 blew apart the consensus estimate of $0.92.
  • Gross revenues were $1.256 billion, up 93% (and 22% sequentially). Net revenues (gross minus traffic acquisition costs) were $794 million, versus consensus of $730 million.
  • Revenue composition: Google-owned sites generated $657 million or 52% of total revenues, up 116%; revenues generated on Google’s partner sites, through AdSense programs, contributed $584 million, or 47% of total revenues, up 75%.
  • International revenues were 39% of the total, up from 35% the prior quarter, largely due to Google's partnership with AOL Europe.
  • Traffic Acquisition Costs (TAC, the portion of revenues shared with partners) was $462 million, up 57%.
  • Income from operations on a GAAP basis, was $443 million, up 186%. Income from ops was 35.2% of revenues versus 23.8%."This improvement in operating margins was primarily due to decreases in both stock-based compensation expense and TAC as a percentage of revenues."
  • Net income on a GAAP basis was $369 million or 29.4% of revenues versus $64 million or 9.8% of revenues.
  • Net cash provided by operating activities increased 155% to $530 million. Free cash flow was $387 million, up 217%.
  • Balance sheet: cash, cash equivalents and marketable securities balance of $2.507 billion at quarter end.
  • Employees: 3,482, up 15% sequentially.

3 Key Take-Aways

  • Google is enjoying astonishing operating leverage: revenues up 93% but income from operations up 186%. Where's that coming from? Two sources:
  1. Google's own search site grew revenues 116%, and the operating leverage in that business is dramatic.
  2. Google's traffic acquisition costs grew by less than the revenues on partner sites: 57% versus 75% . That means that Google is taking a greater proportion of its partners' revenues.
  • Google's net income of $369 million was significantly greater than Yahoo's net income of $205 million. Terry Semel's claim that Yahoo is the best positioned Internet company is curious, particularly given that Yahoo's fastest profit growth is in search.
  • Google is currently the clear leader in search - according to comScore, Google's search share rose to 36% from 35% a year earlier, and leads Yahoo's share of 31%. But competition will intensify when Microsoft releases the next version of Internet Explorer with MSN Search conveniently embedded in the browser (as Google is currently the default embedded in Safari and Firefox).

GOOG chart below.

Posted by David Jackson on April 22, 2005 at 12:01 AM in Earnings results, Sub-sector: Search, ticker: GOOG, ticker: YHOO | Permalink


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