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October 19, 2006

Google Quantifies Its Momentum

Marshall Kirkpatrick

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Google’s third quarter earnings announcement today came in strong, as expected given the company’s growing domination of search and momentum over the last several months. The other big players may be struggling, but Google has the numbers to show that they are not. Gross revenue rose 70% and quarterly profit rose 92% of the same period last year. Net income this quarter was $733.4 million compared to $381.2 million in the same quarter last year. That’s $2.36 per share, up from $1.32 per share in the same quarter last year.

Google faces questions about declining ad budgets, click fraud and product overload but the company’s dominance continues to grow. While Yahoo! and Microsoft are just starting to roll out their own contextual advertising strategies, Google remains a moving target. Yahoo! on Tuesday announced a quarterly net income decline of 38% to $158.5 million. Microsoft will make their quarterly announcement one week from today but reported a quarterly income last quarter that was three times the size of Google’s income announced today.

Nielsen//NetRatings came out with new numbers today finding that Google’s market share in search has grown 24% over the last year to 50% of the total market. Yahoo! grew 12% to 23% market share and MSN/Live dropped 8% to a 6% market share.

CEO Eric Schmidt said in the company’s earnings call that the company’s success was based on five factors: growth in users, increased ad quality, diversity of business activity, a “blizzard of new product launches” and Google’s partner strategy. Schmidt cited partnerships with eBay, Dell, MTV, Fox/MySpace and the acquisition of YouTube in that order.

Sergey Brin started his discussion with the addition of historical archives in Google News, video search, Google Apps for Your Domain, and Google Docs. Brin said in response to questions that integration, or “Features not Products” is an important direction the company wants to move in for the future. Which is it? Diversity is our strength or product overload? Maybe that just means we’ll see fewer new Google products, but they are glad they have as many as they do.

Larry Page said Google has the greatest diversity of advertisers in the world because it’s easy to get involved in search, video and soon audio advertising. Page also highlighted the addition of coupons to Google Maps.

The company also said that future acquisitions would be made in cash, that YouTube’s stock deal was a one time action.

The future remains some what unclear with an office strategy that could succeed or fail, a video strategy that will face legal challenges and the first big competition in contextual advertising ramping up - but Google is looking well prepared for dealing with all of those challenges. While the rest of the big tech companies are experiencing relatively turbulent times, Google put the numbers on the table today to prove that they are going strong.

  • Sphere It

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  1. Amit Chowdhry

    October 19th, 2006 at 2:33 pm

    In my opinion, I think another factor (a tipping point, if you will) that triggered a major user growth+attraction for Google was GMail, even though it is rarely talked about these days. People became instantly attracted to seeing what the hype was behind GMail and started trading items (including a signed Kobe Bryant basketball) for a GMail invitation on GMailSwap.com.

    What does everyone else think?

  2. Mike

    October 19th, 2006 at 2:44 pm

    Google reminds me of those companies that got funded in the late 90’s, we’ll call them Bubble 1.0 companies, that never had a plan or direction. Sometimes they’d generate revenues, most of the times not. They lived off VC money for a few years.

    Google is just the same thing, except the VCs have cashed out and the numbers are a lot bigger. The new VCs? Investment bankers and a large part of the US population that trusts their money to mutual funds and these “brokerages” to invest their money wisely.

    All Google has is search. Everything else is junk until proven otherwise. (Google Docs? — give me a break.) What the numbers–from Google and from the “analysts”–don’t tell you is that the quality of those search results are declining. You don’t need an analyst to tell you that, either. Just do your own searches. Click fraud is rampant (I will never do the Google Content Network advertising ever again since it’s about 99.5% click fraud).

    Where is the strategy? Why invest in something that’s been around 10 years and STILL doesn’t have a strategy and it’s winning product has shown very little improvement.

    Forget the business school analysis. How about the fundamentals of creating a great service? Other search companies out there–like Yahoo (the dinosaur of this industry) and even MSN Search–have made great improvements to their search technologies to better compete with Google! Google can’t hire all of the smartest people, because eventually some of them figure out Google might just be caught up in its own hype and can’t get out of its own way. So, they go to Yahoo, MSN, etc.

    Welcome to Bubble 2.0. Google is your host.

  3. Patricia

    October 19th, 2006 at 2:50 pm

    I think they’ve done really well at taking risks and innovating without really hurting the bottom line - they seem to be really good at striking a balance. It’s not easy. It’ll be interesting to see how things play out and where they’re headed next.

    Glad to see that they’ll be paying cash in the future - this’ll be good when they someday buy my one of my start ups :) (just kidding)

  4. Eric Willis

    October 19th, 2006 at 3:04 pm

    Mike,

    Say what you want about Google: their scattered product strategy or even dependence on ad revenue almost exclusively, etc. They have missed badly on things like Google Base and outside of adwords and adsense have yet to really launch another paradigm shifting product or service. However, one can not deny the success of their model and their continued growth despite declines of their competitors like Yahoo. This is an extremely profitable company that is the envy of the business world right now.

  5. Jonathan Mendez

    October 19th, 2006 at 3:11 pm

    “Google faces questions about declining ad budgets”

    No ones budget for search engine advertising is declining. In fact there are advertisers that are at inventory capacity with Google and need more…a lot more.

    Google’s continued growth is all about increasing this inventory. YouTube was a no brainer. Continued market share helps too. That’s the strategy…and it’s working better than just about any business ever created.

  6. Michael M. Jones

    October 19th, 2006 at 3:41 pm

    As an adwords advertiser on occasion, I can tell you that Google is much easier to work with versus Yahoo / MSN. Everything just works.

  7. michael lambie

    October 19th, 2006 at 4:41 pm

    ah, but what about the 6th factor. the real x factor. the Marissa Meyers Publicity Photo Shoots everywhere become a role model to girls in technology factor.

    I think putting her out there so mcuh makes GOOG more relateable to all people. The other big boys don’t have any female employees on the covers of teen mags.

  8. Startups.in/India

    October 19th, 2006 at 5:35 pm

    Hope the old adage “All good things come to an end” doesn’t apply to Google.

    “Maybe that just means we’ll see fewer new Google products.” Really? Heard quite a few things on the contrary. May be just rumor mills at work :)

    i) Google is building a jumbo jet.
    ii) Google is building a next gen super computer using PCs
    iii) Google is building some networking device - router/switch
    iv) Google is building a data center to enter hosting business
    v) Google is working towards a new top level domain
    vi) Google is trying to enter ISP space
    viii) Google is working on something that will replace traditional telephony in every home
    viiii) Google is developing an operating system.
    ix) Google is going to buy some major company - Microsoft, Cisco, Yahoo, eBay?
    x) Google is …. well I’ll leave it for you imagination. :)

  9. lemon obrien

    October 19th, 2006 at 8:05 pm

    google google googgle gooooooogle go gogooole gogogogggooogoogle
    goo gooogle…just shoot me now.

  10. Rahul Pandhe

    October 20th, 2006 at 12:49 am

    What I love about Google is that its innovative and offers services that try to solve day to day issues. Its OK for a company to milk one smart idea but continue to invest in others. In many ways, Google is like Microsoft. BIG but very agile and they know to protect their turf which includes their investors and employees.
    For the record, I love Microsoft too. They are very innovative even if they dont get it right each time.

    But these companies run the risk of falling out of favour with Wallstreet due to their “more of the same” growth pattern even when they are making tonne of money.

    The YouTube acquisition is a prime example of Google trying to squeeze their search engine model.

    What I am afraid of is this:
    Majority of the ad-clicks Google gets, I bet, is during prime business hours. Which means people are supposed to be working at that time. This is all great for static pages with content to read but when you throw in Video in the mix, I would like to see how a boss can justify having his employees watch video at work. The Work-Life-Balance ends at reading news, research, shopping products. With video we are crossing the limits and also pushing the employers networking infrastructure due to bandwidth requirements. I am already seeing many companies prohibiting streaming video from the web.

    Thus Google can only pat their ego by YouTube acquisition but it would be unwise for them to bet their future direction on this acquisition.

    Keeping focusing on getting new dollars to keep the Wallstreet happy and the stock price inflated, everything else is a community service that must happen.

  11. Vishal

    October 20th, 2006 at 3:16 am

    “Google is going to improve fetaures”.
    I think this is already happening, with Blogger, Feed Reader, Docs&Spreadsheets, Gmail, Google Talk, Groups and others.
    I will say we will see more features and will allow them to
    capture more market. All this diverisfication points me to only one thing.
    Google is the Long Tail.
    http://vashistvishal.blogspot......-tail.html

  12. Chris

    October 20th, 2006 at 6:05 am

    I dunno, I think Google is headed the wrong way in some respects.

    Adwords has gotten less customer friendly over time. It used to be that you could have an ad up in running in 5 minutes. Now it takes 10-12 hours, and sometimes as much as a week to get an ad approved. God forbid you mass change your target url or anything like that as you will not see the same level of traffic for months afterward.

    Another thing is the site relevancy. I run a product aggregator site, and Google has rated my site as low-relevancy, thus my minimum bid is $10 for a lot of terms including “shoes”. I don’t understand how for example Shopping.com is more relevant for the term “shoes” than my site. (other than them spending a crap-load of money with Google) Before I could compete with others for a reasonable price, but no more.

    So, I think Google is going through a phase similar to what Yahoo went through a few years ago. They are transitioning from the nice friendly “the web is for everyone” company to a regular style media company. This means limiting access to those who have the cash to spend.

    The advertising market at the high end is quite volatile, so I think Google might shoot itself in the foot if it alienates small advertisers too much.

    -Chris

  13. Zenrob

    October 20th, 2006 at 9:50 am

    Marshall,

    great summary.

    My review of 1h 2006 puts Google at about 78% Search revenue and 22% Contextual. I’d be curious to know if that shifted in Q3 2006.

    http://zenrob.typepad.com/zenr.....ver_w.html

  14. Eric Jackson

    October 20th, 2006 at 10:57 am

    The differences between momentum at Yahoo and Google have never been more stark than after this call. These results show that Yahoo’s troubles are more the problem of internal than industry issues.

    Here are my suggestions of what 8 steps would help immediately turn things around at Yahoo: http://breakoutperformance.blo.....ss-or.html

    Thanks,

    Eric

  15. Nemrut

    October 20th, 2006 at 1:23 pm

    Google vs Yahoo

    In my opinion there is no comparison between the two. One is leveraging it’s search technology to develop products at lower cost and barrier to entry than traditional shrink-wrap, while the other is a media driven company focused on retaining eyeballs via portal content.

    Although one could argue that Yahoo has made progress in their search/advertising technology, they’re nowhere near reaching the technical expertise and viral growth of Google’s offering. Everyday more and more people are are siging up to be Adsense affiliates which in turn increases Google’s market penetration. Even if none of their other products reach fruition, the triumverate Search/Adwords/Adsense model will continue to be a cash cow until somone develops superior technology.

    In the end, Yahoo just doesnt have an technology savvy executive team that can compete toe-to-toe with Google. If i remember correctly Terry Semel even resisted using email his first year at the helm…

  16. Terry Xu

    October 20th, 2006 at 1:33 pm

    don’t have an idea of what the numbers are about…
    does that mean google needs 1.6/0.073 quarters to pay back the youtube mortgage?

    maybe I need to redo my eco course…
    let me see how the avatar thing works…

  17. sufiy

    October 20th, 2006 at 2:18 pm

    Ok, GOOG at 460, it is time for reflection…today I have closed very nice Trade on SNDK: it was down 21% and my PUTs were flying: very perfect education case. I enter small position in the beginning of the year too early and too out of the money (after today drop even there I can break even), but let myself test the water, on recent spike I have established proper position and today thesis was developed by the market, valuation PERCEPTION was changed and stock was beaten HARD so I ended with nice profit. Why SNDK fall? They beat the Street 0.51 vs 0.49 and on revenue 2% above Street est. but they guided lower! And everybody sell them, GOOG keep silence about the outlook and the same guys who punish SNDK with $46 PT are putting on GOOG PT of $595. Look at their fundamentals in the same report: SNDK forward P/E 2006 is 30.1 est. and 2007 is 28.7 GOOG frwd P/E 2006 is 41.8 and 2007 is 30.4. One stock is down 21% and another is up 7.5%…At the moment bad story about SNDK is known, with GOOGLE with WORSE fundamentals perception is that everything is growing fast and upside is unlimited. What is very important with SNDK: there is no pricing power, competition in COMMODITY business (search is UNIQUE and RESTRICTED to Google?), lower sales (I bet due to Consumer hurt by Housing Bubble bursting and cut back of all users of SNDK on Inventory levels due to Not Rosy outlook) will they cut on chips but spend on ADs even more – hardly and we can see it already in Google financials). Before Hard Data just take a look on Rev growth q on q this q3 it was 9.3% not 10% in conference call (are they pushing figures only here?) but in q2 on q1 Rev Growth was … the same 9.3% miracle, or can I smell some cooking oil? Then we can find out that international Rev contributed 44%, where from do you think click fraud originated: China, Malaysia, Russia and other “pure international destinations”. Why do they use Non GAAP figures together with GAAP ones just for confusion, they love Buffet but he never do it. Why is there is always mysterious:
    “Stock-Based Compensation – In the third quarter, the total charge related to stock-based compensation was $100 million as compared to $109 million in the second quarter.
    For the full year, we expect stock-based compensation charges for grants to employees prior to October 1, 2006 to be $377 million. This does not include expenses to be recognized over the remainder of the year related to employee stock awards that are granted after October 1, 2006 or non-employee stock awards that have been or may be granted. We currently anticipate that dilution related to all equity grants to employees will be approximately 1% to 1.5% per year.”
    Why do not expense all related to the q costs of Labour in all categories of compensation? The only reason that you can play with it but at the year end you will have to charge it. But more to come in hard data posting.

    http://sufiy.blogspot.com/

  18. Skip Trace

    October 20th, 2006 at 3:43 pm

    I agree with previous posts that mentioned that Google is much easier for advertisers to use than Yahoo. I thought about this long ago. I think this is one of Yahoo’s main ad revenue problems.

  19. sufiy

    October 21st, 2006 at 1:18 pm

    Lets keep all media hype away and quick short covering amusement following it and check out Google’s development in recent Q in order to try to understand its valuation compare to its piers. Upside now is known and everybody is on Buy side with price target 600 (+30%). Shorts are killed and short ratio is less than one day trade, no easy money for upside after yestoday short covering left, somebody has to start to buy into this story at this 460 level. First Google came with Rev 2.69 billion which is less then 2.76 which I have projected from PWC predictions of 16-18 billion online ads market in 2006 with Google Share of 40.5% of this market in Q3 (seasonal trend applied) So, first Google did not manage to increase its market share in Q3. Second, lets look at earnings GAAP ($) Q1 1.95, Q2 2.33 (+19%), Q3 2.36 (+1.3%!?) Earnings growth dramatically slowed. Third, revenues: Q1 2.25, Q2 2.46 (+9.3%), Q3 2.69 (+9.3%!?) math’s precision or can I smell some cooking oil here? 44% of revenue is coming from international business. All hitfarms are located in pure “international “destinations India, China, Malaysia, Russia etc. Revenue growth is slowing with increased risk of cutting back on advertisement due to economy slowdown and click fraud awareness buy the customers. Fourth, Net cash from operations Q1 0.825 (37% of Rev), Q2 0.841 (+2% 34% of Rev), Q3 1.0 (+19% 37% of Rev) Capex Q2 0.699 (0.319 Real eastate 0.380 “normalised”), Q3 0.492 (+29%!) So Google Capex increase is really much bigger then their Rev growth 29% vs 9.3% with constant Net cash from operations at 37% Rev, Free Cash Flow is under compression. Total Free Cash Flow for nine months is 1.112. If we will project Rev growth for Google at 12% for Q4 vs 9.3% for Q3 they will make Rev Q4 3.0 (less then based on PWC and 41% of market 3.2) Net cash from operations at 37% of Rev 3.0 will be 1.1, if we apply 20% growth for NCFO in Q4 (vs +19% Q3) we will get 1.2 so lets assume NCFO will be in the middle = 1.15. What about Capex? I think it will be increasing dramatically with moving into video: broadband, storage, new blades, electricity. But if we even aply same growth to capex as to Rev +12% (they said it will be bigger then Rev growth, Q3 was +29%) Capex Q4 will be 0.551. So, Free Cash Flow in Q4 will be NCFO-CAPEX=0.6 and total FCF 2006 will be 1.712 If stock will not move from 460 we have MC=142 billion MC/FCF=83! YHOO is projecting FCF 1.35 in 2006 (lowered recently) with MC at 32 their ratio is MC/FCF=24 If the Google will manage to make even 2.8 EPS in Q4 (+19%) (do not forget annual charge for all those “to be expenced option related expences which they did not account in past Qs) GAAP 2006 will be 9.44. So with GOOG at 460 we have company with 2006 est MC/FCF=83, P/E=48.7, P/S=14.2 with slowing growth in EPS and Revenue and most important with dramatic compression in FCF. YouTube will bring dilution, much more CAPEX in Video Game and No revenue so far. What is the more reasonable valuation of Google: if we give GOOG MC/FCF=40 (69% over YHOO for leadership and “strength”) MC with 1.712 FCF must be 68.5 billion with 310 million shares outstanding before YouTube diluton it is…221 share price. When MR Market will figure it out I do not know, but I am testing the water with March 2007 460 puts.

    http://sufiy.blogspot.com/

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