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Google Off to the Races

Vishesh Kumar

Updated from 7:21 a.m. EDT

Google's(GOOG Quote) well-oiled money machine keeps humming.

Shares jumped more than 3% early Friday in the wake of the search giant's latest earnings blowout. The $16.35 gain to $488 puts the stock back in striking distance of $500, a level Google hasn't touched since January.

First-quarter profit before items jumped to $3.68 a share on revenue of $2.53 billion, excluding the money Google shares with advertising partners. Analysts surveyed by Thomson Financial were looking for a profit of $3.30 a share on net revenue of $2.49 billion.

The 38-cent beat marks an upside surprise of 11.5%. During the last two quarters, Google beat analysts' expectations by only about 8%. The company hadn't beaten estimates by this margin since the June 2006 quarter, when it came in 12% ahead.

But investors have become well-accustomed to Google's habit of making Wall Street estimates look timid. Shares moved up $13.20, or 2.8%, in after-hours trading to $484.85, reversing a drop of about $4 the stock felt in the regular session.

While Google continued to announce a spate of new products and partnerships over the quarter, CEO Eric Schmidt drew attention to the search ad business that still makes up the overwhelming majority of Google's revenue during a conference call for investors.

"Sometimes I worry we talk so much about new things that we forget to talk about our core business," Schmidt said. "But it's the strength of that business that allows us to take calculated risks with new products." "Targeted and effective advertising continues to be our mantra," Schmidt said. "The benefit to the user is the most important thing we focus on." However, Schmidt did caution investors that the approaching summer season tends to be its slowest.

For the quarter ended March 31, earnings rose to $1 billion, or $3.18 a share, from the year-earlier $592 million, or $1.95 a share. Gross revenue rose to $3.66 billion from $2.25 billion a year ago.

"The global growth of our core search and ads business and our focus on building our partnerships drove our strong results in the quarter," said Schmidt in a post-close press release. "We continued to expand our worldwide footprint, adding important new partners and growing our platform to increase our ability to deliver targeted and measurable ads. The ongoing expansion of our network allows us to improve the user experience through new opportunities and programs."

Paid clicks, which make up the overwhelming majority of Google's revenue, continued to soar. Combined clicks on Google's search ads and through its advertiser network increased 42% year over year and 13% sequentially.

Google's closely watched operating margins also edged up sequentially. Non-GAAP operating income in the first quarter of 2007 was $1.41 billion, or 38% of revenue. This compares to non-GAAP operating income of $1.20 billion, or 37% of revenue, a year earlier.

Although Google's traffic acquisition costs -- the dollars it shares with ad partners and the amount that's discounted to formulate net revenue -- moved higher on an absolute basis, it remained flat at 31% of advertising revenue.

Google's percentage of international revenue continued to move higher, though currency fluctuations played a role in this. Revenue from outside of the U.S. totaled $1.71 billion, representing 47% of the total for the first quarter of 2007, compared with 42% in the first quarter of 2006 and 44% in the fourth quarter of 2006.

Google said Schmidt has been elected chairman, while Stanford University President John L. Hennessy, who has been on the board since 2004, was lead independent director.