Google Blows the Doors Off

Investors had expected Google to struggle to control capital expenditures to fuel its explosive growth.

"This is just an incredibly powerful business model,'' says Larry Haverty of Gabelli Asset Management, which owns Google shares. "It's just a tremendous quarter.''

The company did offer one cautionary comment on coming quarters. "We expect that the growth rate in capital expenditures in 2006 will be substantially greater than the revenue growth rate for the year," Google said. "We expect the majority of investment to be focused on IT infrastructure including servers, networking equipment and data centers, as well as real estate and campus facilities."

"You should continue to expect compression in net and operating margins as we go forward and invest in the business," finance chief George Reyes said on the call, elaborating on the capital spending comments.

GAAP operating income for the first quarter of 2006 was $743 million, or 33% of revenue. This compares with GAAP operating income of $570 million, or 30% of revenue, in the fourth quarter of 2005. Non-GAAP operating income in the first quarter was $887 million, or 39% of revenue. This compares with non-GAAP operating income of $718 million, or 37% of revenue, in the fourth quarter.

Traffic acquisition costs, the portion of revenue shared with Google's partners, increased to $723 million in the first quarter. This compares with TAC of $629 million in the fourth quarter. TAC as a percentage of advertising revenue decreased to 32% in the first quarter from 33% in the fourth quarter.

Google-owned sites generated revenue of $1.30 billion, or 58% of total revenue. That's up 97% from last year and up 18% sequentially. Google's partner sites generated revenue, through AdSense programs, of $928 million, or 41% of total revenue. That's up 59% year over year and up 16% increase sequentially.

International revenue contributed 42% of total revenue, up from 38% in the fourth quarter of 2005 and 39% a year ago.

The news could snap Wall Street out of its recent funk over Google's stock.

In its first 16 months as a public company, the Mountain View, Calif., Internet search giant could do no wrong. Google shares doubled in 2004 off their initial public offering in August of that year, and then doubled again last year. The stock soared through the first half of January this year, touching $475 at one point.

But since then, Google's many fans have been in for a rougher ride. First, investors were shocked by the company's disappointing fourth-quarter earnings, posted Jan. 31. A series of embarrassing investor-communication gaffes followed. The stock tumbled as low as $331 last month before staging a recovery that has put Google stock flat for the year.

"Q2 and Q3 have slower revenue growth," Schmidt says, reiterating the company's long-standing comments about seasonality.

"We are working on greater transparency in what we do," the CEO says, adding that Google will continue not to give guidance.

In late trading Thursday, Google rose $25.59 to $440.59