Google Growth Continues with $1 Billion Profit

You sometimes know the news isn’t all good about a company’s earnings when it casts a bright spotlight on its revenues; a company can make a lot of money without necessarily earning it. Google is the antithesis of such a company, earning an astonishing one-third of its revenues while still sharing nearly a billion dollars with its traffic generation partners.

Google closed out its fiscal year 2006 having reaped just over $3.2 billion in revenues for the final quarter, a gain of two thirds over the fourth quarter of 2005. Of that $3.2 billion, just over $1 billion of that is net earnings, an 86% annual gain – meaning Google is even more efficient now than it was last year.

Just what does this mean relative to other software giants in the same space? Take a look at the end-of-year quarterly numbers from last week from Microsoft - certainly a healthy company by most standards: Of $12.5 billion in earnings, Microsoft earned $2.6 million (counting a deferral of early Vista sales) – about 21%. By contrast, Google earns 32% of its revenue, a few points down from earlier quarters but still admirable.

Yet it accomplishes this while maintaining a unique business model that allows for revenue sharing with partners in its AdSense and other programs. Google calls these “traffic acquisition costs,” and this last quarter, they were doled out to partners to the tune of $976 million. In the previous quarter, the TAC amount was $825 million, but the news there is that TAC stayed flat as a percentage of revenue: 31%.

In other words, Google is generally controlling its costs, although other costs of revenue did tick up slightly, from 8% in Q3 2006 to 10% in Q4. So while costs are rising –- and some analysts touted that fact this afternoon –- they are more or less rising in proportion with revenue, which is a mark of a well-tuned corporation.

But analysts, whose calculators may still be on the blink even after mis-reporting Microsoft’s numbers from last week, seem to be compelling investors to sell, even though revenues officially exceeded their expectations. Over-emphasis on the fact that costs rose, even though sales rose in tandem, drove Google stock to lose 3% of value in after-hours trading Wednesday.