Google still searching for higher profits

Google has defied doubters of its model by posting a big profit and revenue hike. Yes, again.

by
Last Updated: 31 Aug 2010

Times may have been a bit tougher for Google lately, but the internet behemoth is still raking in the cash: it’s just reported first-quarter net profits of $1.4bn, up 9% on last year, while revenues jumped 6% to $5.5bn. Google hasn’t escaped the effects of the downturn – it recently made its first-ever redundancies, prompting much hand-wringing in the tech sector – but it’s clearly pretty well-equipped to survive the current turmoil in its core advertising market.

The ‘shocking’ aspect of these results is that Google’s top-line is actually lower than it was in the previous quarter – the first time this has happened in its four years as a public company. Indeed, we’re so used to hearing Google report double-digit revenue growth that even a year-on-year increase of 6% seems relatively pedestrian. Not that it comes as a great surprise: with the recession biting hard on both sides of the Atlantic, the advertising market as a whole has taken a dive – and many analysts thought that Google, which is so dependent on ad revenue, would feel the pinch. Sure enough, its AdSense network of partner sites saw revenues drop 3% during the period.

However, Google isn’t exactly struggling. Revenue growth might be slowing (as it was always going to eventually), but the company seems to be working smarter: its operating margin apparently increased from 33% to 34% last quarter, despite a relatively small number of redundancies – rather than slashing headcount, it’s focused on increasing the number of paid clicks and cutting traffic acquisition costs. And it remains massively cash-generative – it raked in $2.25bn last quarter, which is quite a safety net.

These results also suggest that the decline of the online advertising market has been greatly exaggerated, as CEO Eric Schmidt was quick to point out. Even if individual advertisers are forking out less overall, Google seems to be benefiting as companies move their spend online, away from traditional channels like newspapers and TV – and Google’s share of this market is so big that they’re the principal beneficiary. This is offsetting the effects of the slowdown – and since it’s likely to be a permanent trend, Google is well-placed to cash in as the economy picks up.

Google’s iron grip on the search market shows no sign of weakening - in fact, its share of US searches actually rose (to 64%) last month - and with so much cash in the bank, it can invest to make sure this number keeps rising. That’s bad news for its competitors – and those of you worried about its all-pervasive influence on digital life – but good news for Schmidt and his investors...



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