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Google Posts Big Gains in Sales, Profit

3rd-Quarter Earnings More Than Doubled

By David A. Vise
Washington Post Staff Writer
Friday, October 22, 2004; Page E01

Google Inc. yesterday reported that sales and profit more than doubled in the third quarter -- despite a one-time expense of more than $200 million -- as the company issued its first quarterly financial report since going public.

Google shares traded above $160, up about $20 for the day, in after-hours trading following the announcement of the search engine's financial performance. During the regular trading day yesterday, Google shares closed at $149.38, up $8.89. The company sold stock to investors in August for $85 in its initial public offering.

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"Even as we completed our public offering, our management team remained focused on delivering high-quality products and services," said Eric E. Schmidt, Google's chief executive, during a conference call with Wall Street analysts. While emphasizing the company's desire to make decisions based on long-term considerations, Schmidt said, "We are very pleased with the short run, and in particular, the performance of this quarter."

Google reported third-quarter net income of $52 million (19 cents a share) on revenue of $805.9 million, compared with a profit of $20.4 million (8 cents) on revenue of $393.9 million in the same period last year. The company had one-time, non-recurring expenses of $201 million related to settling two legal disputes with rival Yahoo Inc.

Without the various one-time charges, Google would have reported operating income of $212.1 million, compared with $66.6 million. Wall Street analysts and professional investors view the company's dramatic increase in operating income as a more meaningful measure of its ongoing financial performance than its net income, due to the one-time expenses.

Google previously projected a third-quarter loss because of the hefty one-time expenses. Both Google and its chief competitor, Yahoo, reported strong financial results this month, as the firms profited enormously from the increasing amount of advertising on the Internet.

Google, which recently introduced a new way for computer users to search the Internet and their personal computers for information simultaneously, is focused on continued technological breakthroughs, according to Larry Page, co-founder of the company. He said 70 percent of the company's engineers are focused on supporting the company's core search engine and advertising product, while 30 percent are working on new and emerging businesses.

"We are known for experimenting and working on large-scale engineering projects. We have the world's greatest engineering talent," Page said during the conference call. "Google has the means to innovate rapidly. This infrastructure is a competitive advantage to Google across all of our existing products."

Co-founder Sergey Brin said Google's growth overseas is largely responsible for its continuing success, adding that the company just opened its European headquarters in Dublin. The company recently replaced Yahoo as America Online's search engine in Europe, he noted, adding that it had made new deals in Japan and won key contracts to serve as the main search engine of the United Nations and the British Library.

Google could face business and financial challenges in the year ahead as Microsoft Corp. introduces a competitive search technology. And its stock could come under pressure as employees and original investors in the company unload more of their shares on new investors.

But in the meantime, the company's trajectory, Schmidt said, remains upward. Google's revenue in the quarter was divided pretty evenly between advertising on its Google.com Web site and revenue it earned from partner Web sites that use the search engine.

The company had no debt and $1.9 billion in cash on its books as of Sept. 30, compared with $549 million at the end of the second quarter. The surge in cash was due mostly to money raised in its initial public offering, along with that generated by its sale of online advertising.

Google offers free software used to find information and answers to queries on the Internet. The company's profits come almost entirely from the online advertising it sells. The ads appear above and to the right of the search results Google generates. Advertisers like the online search engine because they are charged only when users click on their ads, which typically are related to the topic being researched.

"Google's business strategy is about solving problems that matter to many people on a global scale," Page said. "We have only begun work on our mission to organize the world's information to make it more accessible."


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