Not since Microsoft’s heyday in the 1990s has a tech company so thoroughly dominated an industry as Google dominates the search business. Google released its first quarter 2011 financial results last week and the numbers show a company with near historic — no joke — profit margins, buckets of cash, roughly 26,000 worldwide employees, and top-line revenue that grew by 25 percent.
It’s a financial juggernaut, in other words, and its only apparent weakness may, paradoxically, stem from its dominance: Nearly 70 percent of revenue comes from its paid search advertising business, making it potentially vulnerable to future alternatives to search and pay-per-click ads.
Behind the Numbers
Google was founded in 1998 by two Stanford University graduate students, Larry Page and Sergey Brin. Fast forward to 2011 and Page is now 38, Brin is 37 and the company is on track to post over $35 billion in revenue for the year. Its first quarter revenue was $8.5 billion. Net profits were $2.3 billion for the quarter, or nearly 27 percent of revenue. No company in recent memory — save Microsoft in the 1990s — has achieved a combination of growth and profit percentage as has Google.
The company’s 26,000 employees are now located in over 50 countries and it offers its services in roughly 100 languages. More than half of its total revenue comes from outside the U.S. Eleven percent comes from the United Kingdom.
Google’s AdSense network generated roughly $2.43 billion of revenue for the quarter and, interestingly, Google paid roughly $2 billion of it to its “partner” websites that actually publish the ads. This translates to an AdSense gross profit of approximately 18 percent, which, by Google’s standards, is a drag on earnings. Revenue from Google’s Android mobile operating system is miniscule to date, accounting for no more 1 percent of the total — at most — during the first quarter.
The company has, as of March 31, over $40 billion in cash, securities, and receivables, against just $3 billion of short-term debt. It can easily purchase most any midsize — or larger — competitor or complementary business. The company’s common shares — as of this writing — traded at $525 apiece, which is a relatively modest 13 times prospective earnings per share, suggesting a rise in the stock price may occur.
Comparison to Other Internet Companies
Microsoft, with its core software business, remains larger than Google in total revenue and net profits, at roughly $67 billion and $20 billion, respectively, for 2010. (Google’s 2010 revenue and profits were roughly $31 billion and $9 billion.) But Microsoft is growing much more slowly than Google and, at its current growth rate, Google’s revenue and profits could surpass Microsoft’s in, perhaps, 2014.
Amazon’s 2010 annual revenue of $34 billion approximates Google’s for that year, but Amazon’s 2010 net profits of just over $1 billion are much less than Google’s, reflecting the realities of online retailing.
Yahoo! recorded total revenue in 2010 of roughly $6 billion — one-fifth that of Google’s — and net profits for that year of $1.2 billion. eBay — which owns PayPal and recently invested in the Magento ecommerce platform — posted 2010 revenue of roughly $9 billion, with $1.8 billion of net profits for the year.
Google has yet to pay dividends to its common shareholders. The same is true for Amazon, Yahoo! and eBay. Microsoft does pay common dividends, resulting in an annual yield to its shareholders of roughly 2.6 percent, as of this writing.