Profit Rises Sevenfold at Google

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October 21, 2005

By SAUL HANSELL
Finding more ways to make money from its spot as the world's most popular Internet search engine, Google topped Wall Street expectations yesterday and posted a sharply higher profit in the third quarter.

The results even exceeded the expectations of the company.

"We were surprised, pleasantly, I might say," Google's chief executive, Eric E. Schmidt, said yesterday in a telephone interview.

Google earned $381 million, or $1.32 a share, in the third quarter, up more than sevenfold from its $52 million, or 19 cents a share, a year ago. Last year's results were depressed by a $201 million noncash charge related to settling a patent dispute with Yahoo.

Google shares rose about 10 percent after the announcement, which was at the end of regular trading. In after-hours trading, shares hit $335, a record, up from the $303.20 closing price in regular trading.

Mr. Schmidt said the strong growth did not come from more users, as traffic slowed in the summer, but from Google's growing ability to earn more money from Internet searches.

Part of the increase, he said, is coming from higher demand for search advertising, especially among larger companies, which in turn raises the bidding for advertisements. (Google runs a complex auction in which advertisers bid how much they are willing to pay if a user clicks on their ad.) In addition, Google has deployed more sophisticated technology to select which of the millions of advertisements to put on each page and in what order.

"It is really about getting the right ad to the right person at the right time and having them click on it," Mr. Schmidt said.

Safa Rashtchy, an analyst with Piper Jaffray & Company, said one driver of the strong results was that Google had been able to convince major marketers that search engine advertisements - which are mostly short snippets of text - are good ways to promote brands rather than simply to consummate immediate sales.

"You see General Motors interested in being in front of users any time they type in anything automotive," he said, "rather than just for products they sell."

Mr. Schmidt said that Google was working to develop graphical advertising and had expanded ways for marketers to promote their brands.

Google's revenue in the quarter was $1.6 billion, up 96 percent from $805.9 million a year ago.

Analysts were particularly impressed that this amount grew 14 percent from the second quarter, given that the summer is typically a slow period for advertising.

Google said that revenue from Google.com and other sites it owned was $885 million, up 20 percent in the quarter.

Revenue from selling advertising on sites owned by other companies, like those of America Online, was $675 million, up 7 percent in the quarter. Of that, Google paid $530 million of the advertising revenue it received back to the site owners.

Google ended the quarter with $7.6 billion in cash, bolstered largely by $4.3 billion it raised in a stock offering. The company's operations generated an additional $647 million in cash.

Google's also continued to spend money rapidly. It made $293 million in capital expenditures - a large amount for an Internet company.

Some of that expense relates to Google's need to expand its offices to house its growing work force, Mr. Schmidt said, but much of it is invested in Google's network of computers that index Web pages and operate its site.

"There is very large capital spending associated with data centers," Mr. Schmidt said. "We move very large amounts of information."

The company also spent $152 million on research and development, up 167 percent from a year ago. Most of that was the salaries of engineers, whom the company has been hiring in droves.

Google added 806 employees, giving it a total of 4,989 full-time workers at the end of September.

"They did the right thing and invested a lot of money back into R.& D. and their infrastructure," Mr. Rashtchy said. This, he said, will put Google in a position to continue its revenue and profit growth in coming quarters.

"Most of the numbers will just go way up," he said.

Copyright 2005 The New York Times Company