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Google Profit Multiplies in Fourth Quarter

Ad Prices and Demand Lead Push; Stock Jumps

By David A. Vise
Washington Post Staff Writer
Wednesday, February 2, 2005; Page E05

Google Inc. yesterday reported that profit skyrocketed more than sevenfold in the fourth quarter, a jump executives attributed to various factors, including higher prices paid for ads and a larger amount of Internet advertising from the 1,000 biggest U.S. companies.

In an interview, Google chief executive Eric E. Schmidt said the strong results far exceeded his expectations. He said the price of Google ads increased sharply because of an influx of new advertisers and because the company has been able to demonstrate that results from Google ads can be measured more precisely than those from traditional forms of marketing.

Even Google CEO Eric Schmidt seemed surprised by the profit, saying, "I would not have forecast this." (Paul Sakuma -- AP)

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"Had you asked me in October, I would not have forecast this," Schmidt said. "It is a combination of salesmanship, better tools, growth of market and better technology."

In the fourth quarter ended Dec. 31, Google earnings rose to $204.1 million (71 cents a share), from $27.3 million (10 cents) in the comparable period a year earlier. Quarterly revenue rose to $1.03 billion, from $512.2 million.

For all of 2004, Google's earnings rose to $399.1 million ($1.46), from $105.6 million (41 cents) in 2003. Revenue rose to $3.19 billion, from $1.47 billion.

Google announced its financial results after the Nasdaq Stock Market closed yesterday. In after-hours trading, the results and accelerating growth rate pushed the stock to a new high, above $210, from its closing price of $191.90.

Google first sold stock to the public last August for $85 a share. The company's stock is now trading at more than 230 times quarterly earnings per share, a frothy multiple that some warned could drop in the event the search engine's momentum slowed.

Another potential risk in Google stock is the more than 100 million additional shares that employees will be allowed to sell beginning in mid-February. Google is also facing increasing competition from companies including Microsoft Corp., which yesterday formally rolled out its own search engine technology and said it would increase spending to promote the new software.

Schmidt, however, said the biggest risks Google faces are not the ones typically cited, such as increasing competition, because the market for Internet advertising is growing rapidly enough for Google and other firms to thrive. Instead, he said the search engine's "biggest threat" involves managing the torrid pace of day-to-day growth, as new offices are opened around the world and increasing numbers of employees are hired.

Schmidt said that in 2005, computer users will see significant changes in the Google search engine and related products, some of which may catch on quickly while others may not. "I'm very excited about how Google will look to the end user in six to 12 months, lots of new and interesting ways," he said.

Larry Page, co-founder of the Silicon Valley-based firm, told analysts that the additional focus on working closely with the biggest companies, and their ad agencies, enabled Google to persuade them that Internet advertising deserved a bigger chunk of ad dollars. Google sells ads that are served up alongside its search results. Advertisers bid in special auctions on what search terms they wish their ads to be associated with; they pay only when a computer user clicks on their ad.

According to Page, Google trained advertising executives on how to use the search engine -- including a program to certify their level of expertise and ability to closely track sales generated from Google ads. "This is a great driver of growth," Page said during a conference call with Wall Street analysts.

To promote itself abroad, Google continued opening new sales offices around the world, as well as adding research and development jobs in Europe, Asia and Washington state, near Microsoft's headquarters.

Google co-founder Sergey Brin said the company's continuing success is heavily dependent on attracting and retaining the brightest engineers, who might like the idea of working for start-up companies. Brin said the company recently began offering multimillion-dollar financial rewards to its employees for innovative breakthroughs.

Google -- which has nearly $2 billion in cash and no debt on its books -- gave $12 million in stock awards to two small teams of engineers, one that developed new advertising technology and another that came up with innovations in design. For one of the teams, he said, the financial award was worth more than $1 million per employee.

"As with many fast-growing public companies, one of our challenges is to sustain the appeal and culture of a start-up so we attract innovators and entrepreneurs," Brin said. "We hope to give many more such awards."

Schmidt and other Google executives said the outlook for 2005 is bright, particularly because of the opportunity to increase ad revenue from parts of the world where Internet advertising is in its infancy.

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