Google juggernaut rolls on

It has been a tough 2010 for the internet giant, yet first-quarter profits are still up by a third on last year's, reports Nick Clark

Sunday 23 October 2011 00:27

Google has faced a series of uncomfortable issues, from concerns over privacy, criticism from the media sector and increased scrutiny from the regulators in Europe. Yet none of these factors has stopped the group from reporting another strong quarter, and executives have outlined plans to ensure it keeps growing. The company, based in Mountain View, California, revealed its first-quarter results on Thursday night, posting a 35 per cent rise in net profits in the three months to the end of March at $1.9bn (£1.2bn). Revenues rose 23 per cent year on year to $6.7bn (£4.4bn).

Patrick Pichette, the group's chief financial officer, presented the results in the absence of the chief executive, Eric Schmidt. "As we enter 2010 it is really clear the digital economy continues to grow rapidly and at Google our users and advertisers all continue to benefit from this profound and positive trend," he said. "Our first-quarter results are simply a reflection of these trends and this really fuels our optimism as we continue to invest in innovation for the long run."

The share price dropped yesterday despite Google hitting the higher end of analysts' expectations. Jamie Mitchell, an analyst at Goldman Sachs, put the slide down to "too- much-information syndrome, with investors seizing on any debatably negative data points." Investor expectation is just one of the problems the company has had to deal with in recent months. Whit Andrews, an analyst at Gartner, said: "Some of the issues Google faces are growing pains. Its decision to pull out of China was a growing issue, it was the company saying: 'This is who we are.'"

Google makes almost all its revenue through online advertising. Ads on its sites generated $4.4bn (£2.9bn), up 20 per cent year on year. Those it placed on third-party sites for clients generated $2bn (£1.3bn), up almost a fifth. Mr Andrews said: "Google has a great advantage today over its rivals based on its excellent brand and the excellence of its search engine." He added it was "extremely difficult" for rivals such as Yahoo! to overhaul the group. The group sees 64 per cent of all search inquiries around the world, according to the market-research group comScore.

One of the fastest-developing businesses is the growth of search on mobile phones. The group dominates advertising in this area in Europe, which has prompted Vodafone to call for regulatory scrutiny. Google calls mobile the "third axis" while Mr Schmidt earlier had said his developers now think "mobile first". Gartner predicts mobile advertising revenues will rise from $530m (£345m) in 2008 to $7.5bn (£4.9bn) within two years. Mr Pichette said Google was benefiting from the growth in sales of smartphones which can access the internet. He added the company had been "running on all cylinders".

"The healthy momentum from the fourth quarter and the general economic recovery has simply continued, resulting in a very positive start to the new year for us," he said. It boosted revenues through new products, such as the launch of its Nexus One mobile phone earlier in the year.

The group is continuing to develop new products for its core search engine. Earlier this year, it unveiled advances in Google Translate, voice search and Google Goggles, the visual search engine. This week it bought the UK start-up Plink to complement the service. Mr Pichette said: "Our continued success really depends on delighting users with differentiated products that really inspire." The group has been highly acquisitive and plans a series of further deals. "It is really designed to build on our existing focus areas and to bring new talent and new technology to Google, feeding our entrepreneurial spirit," he said.

Yet Gartner's Whit Andrews does not believe the juggernaut is unstoppable. "Google does not have the magnetic effect of a Facebook or an eBay. You could change from Google to a rival with no cost. If you wanted to leave Facebook you would have to take all your friends with you. With eBay, you'd have to convince all the sellers to come over."

Google has attempted to remedy this with launches of Google Wave and Buzz. "It is trying to leverage its existing position to more successfully create that magnetic effect," Mr Whitman said. "Those initiatives haven't been that successful."

Growth at the company's core businesses has not been affected. It has 20,621 full-time employees and Mr Pichette said that there would be more to come. "We expect to continue hiring aggressively through the year," he said. "We have a strong pipeline of candidates primarily focused on engineering and ad sales and we are [recruiting] to fuel our growth agenda as fast as possible."

He added: "We are very pleased with the performance in the first quarter across revenue, margins and cash flow. As a result we are very optimistic and therefore are pushing ahead with significant investments."

Google: What makes the money

Discounting a slight dip during the downturn, Google's quarterly revenues have more than tripled in the past seven years under the guidance of its chairman and chief executive Eric Schmidt. The group's model is built on advertising, which provided about 97 per cent of last year's $23bn (£15bn) sales. In the first six months of 2009, companies for the first time spent more on advertising online than on television. The most popular format was paid-for search advertising, an area dominated by Google. It managed to grow this market while more traditional advertising suffered. Google's websites generated $4.4bn (£2.9bn) in the first quarter of 2010 – 20 per cent more than in the first quarter of 2009 – principally through its AdWords system. Every time a computer user types in a search keyword, a split-second auction is carried out on Google's systems. Advertisers pay anything from a few cents to tens of dollars to appear when certain words are typed into the engine and appear alongside traditional search results.

A strong area of growth for Google is mobile search advertising, with Gartner predicting revenues will soar. Google's partner sites generated $2bn (£1.3bn) through its AdSense program, 24 per cent more than in the previous year. AdSense is an advertising broker that allows companies to place adverts on third-party sites, with Google taking a cut. Remaining revenues come from branded email systems and other corporate tools, and its move into mobile phones with the launch of the Nexus One.

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