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.<!--more--> 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