The Future of Internet Advertising Still Belongs to Google

Search giant and Internet bell-weather Google (GOOG) reported 1st quarter results after the closing bell Thursday, and although traders were confused and opinions varied wildly, the company blew the doors off of another strong 3 months. These strong results came to $4.12/share in earnings versus an estimated $3.96/share. Excluding items Google earned $4.84/share vs an expected $4.55/share.

Profit this quarter rose to $1.3Billion from $1Billion on a year over year basis and perhaps even more impressively, climbed from $1.2Billion over the holiday quarter. With that also comes net cash additions of almost $1Billion into Google's coffers. At the top line, Revenue was also impressive, as Google for the first time broke the $5Billion revenue mark for a quarter. Also, for the first time, international revenue led US Revenue by a 51-49% margin.

So is there anything negative to be said about the quarter? Well, international growth has been very strong, and this is somewhat inflated by the weakening of the US dollar. A nit-pick point for some, but Johnson & Johnson (JNJ) reported a majority of its quarterly growth was simply due to currency conversion. Traders weren't too impressed and sent JNJ lower. The response to Google's international growth and quarterly numbers? Overwhelmingly positive, with shares up in after-hours almost $75 to $524, after closing at $449 in regular trading.

Was DoubleClick a factor in the increased numbers? No, in fact management's statement relayed to investors that DoubleClick's revenue was completely immaterial and income was dilutive to the general numbers. DoubleClick will become a factor in Google's earnings going forward, but for the first quarter, this part of the company was in the fold for only 20 days. Google is also being adamant about reducing headcount from DoubleClick due to overlap, which should lower DoubleClick's expense footprint going forward.

The margin question? Google maintained the same 30% margins that the company witnessed over the holiday quarter. The good news on this front is the fall of Traffic Acquisition Costs [TAC] to 29.2% from 30.3% in the holiday quarter. Maybe results were boosted by a low tax rate? Google's tax rate this quarter: 24%, comparing to the holiday quarter tax rate of 25%. Seemingly a non-issue when it comes to these quarterly results.

Google seems to be positioning itself to grow even more substantially internationally and as the slowdown in the US, especially in the Financial Sector, continues to put pressure on earnings, and advertising Google seems poised to hold its own and continue to deliver top notch results. The recently completed test ad partnership with Yahoo (YHOO) was reported to be a success and Yahoo is reportedly trying to expand the partnership in order to shore up its own bottom-line. Just a testament to how efficient and ahead of the game Google's AdWords and AdSense programs really are.

Due to Thursday's after-hours stock surge, Google will be once again in a P/E range bordering on expensive (trailing P/E of 37, forward P/E about 30) given the overall US economic picture, but when comparing it to its main Internet competitors such as Yahoo, the company is simply executing better and deserves its premium valuation. As CEO Eric Schmidt put it "It's clear to us that we're well positioned for 2008 and beyond, regardless of the business environment that we find ourselves surrounded by".
Google's Ad game is in full stride with AdSense and AdWords, the earnings and revenue speak for themselves, but now with the beginnings of monetization of YouTube and Video Advertising Google is looking beyond search ads towards next generation drivers of explosive growth. This same strategy applies to DoubleClick with banner/display advertising also. Becoming an all-encompassing Ad-Platform is clearly in Google's sights, as is their long term plan/goal of becoming a $100Billion Revenue company.

Google's dominance in search is well known, and for yet another quarter, its ability to monetize and deliver outstanding growth has also been confirmed. With its main competitors in Search (Yahoo and Microsoft (MSFT) dancing away and towards each other with merger talks and other distractions, the core search advertising business is Google's for the taking.

Disclosure: Author owns GOOG

Comments

[mojobeta]

The interntional business in Japan and Korea is booming. They clearly said so. And although ads on PDAs and Laptops in China are minimal, the proliferation of PDAs and Laptops is extraordinary and will lead to tremendous growth for Google going forward.