Google meets Wall Street and Main Street

By T.K. MALOY, UPI Deputy Business Editor   |   April 30, 2004 at 5:08 PM

WASHINGTON, April 30 (UPI) -- The waiting is over for ubiquitous search-engine Google to announce its IPO; now that they have, what's the rumbling on Wall Street and Main Street?

Among other things, the company unveiled at long last its earnings on Thursday, showing a robust net profit for last year, while in a statement to potential investors, Larry Page, one of Google's co-founder, said the company was not going to be issuing quarterly guidance to shareholders.

Instead, much like Jeff Bezos, chief executive officer of Amazon, the company seems to be saying, "be patient, be patient."

"A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half hour," wrote Google co-founder Larry Page in "Letter from the Founders" included in the company's filing with the SEC.

While this statement has its cheerleaders and critics alike, it is obvious that not only does Google want to maintain at least part of the entrepreneurial culture that has yielded a degree of success, but also does not want to be buffeted by the kind of shareholder pressure that can prompt decisions only to drive up the stock or to accounting shenanigans.

"In the Google IPO prospectus, founders Larry Page and Sergei Brin promise to run the company their way, following the independent course that enabled Google to be successful as a fledgling company," said Bonnie J. Roe, securities partner at the law firm of Day, Berry & Howard LLP. "The two founders and their CEO, Eric Schmidt, will continue to make most decisions, and will choose long-term rewards, which may also carry risk, over short-term predictable results that may be easier for the market to understand."

She added, "These are laudable goals, but pose new risks as well. What are the appropriate limits on management's creativity, if short term results are negative? What are the directors' duties to rein in management if things do not go well? How should an independent board of directors attempt to control the company in the face of independent managers?"

Analyst Mark Mahaney of American Technology Research, an independent research firm, said of Google's financials: "Given widespread speculation on the Google financials, the actual numbers may not have been that surprising. But we still found the financials very impressive. We also believe Google's financials are impressive relative to the Net leaders."

Mahaney noted Google's company's 2003 revenue of $962 million, saying it was "impressive, given that it is only the second full year in which Google has really attempted to ramp up its advertising revenue," adding that the company's 118 percent year-over-year growth in the March quarter was also strong and only a modest deceleration from the 124 percent year-over-year growth of the December quarter.

Mahaney also noted that of the company's 64 percent EBITDA margins in 2003 were robust, saying, "it is rare that companies can grow the top line like this; but it's even rarer that companies can grow the top line like this and ramp margins that high that quickly."

Other solid financials included a 2003 free cash flow of $218 million, up 85 percent year-over-year. And, a 30 percent portion of revenue in the March quarter, which came from international business, which Mahaney said was a "positive surprise to us, we would have expected international revenue to be more like 10-20 percent.

Also, while Google's March quarter revenue was half the size of eBay and under 75 percent the size of Yahoo, but its revenue growth was more than 2 times that of either company.

In keeping with Google's online business model, the company will be running it as a electronic auction, which will reduce the underwriting fees paid to any respective investment bank handling the IPO and make for a level playing field for any potential issue buyers who could bid on shares directly. While such an online auction of shares would not be a first, this would be the largest.

Known as a "Dutch" auction, the process allocates the stock based on public bidding which sets the price according to an equilibrium achieved through high and low bids. Among other things, the process assures no favoritism as both the issuer and the underwriting banker have no control over the process.

Portfolio manager Barry Randall, manager of the First American Funds at US Bancorp Asset Management, hailed the long-awaited news of the Google IPO, but also noted some of the ambiguous elements of the announcement for the financial markets.

"Wall Street is reacting ambiguously, because this is one of the hottest news stories, not just for business news but for the rest of the news. Most of the competitors (Amazon, Yahoo, eBay) are falling, but not just because it's a bad day in the market; people are pleased that Google financial is living up to the expectations, but one more competitor in the marketplace isn't always a good thing," Randall said.

"The public is very pleased, because the company has 100 percent revenue growth, but is also dedicated to including retail investors, which is an unusual combination. But Google is a popular company that even people who are less tech-savvy can recognize the name, and will offer to buy shares," Randall said, adding the warning, "That is, until they price the deal. Using the Dutch auction format, they won't set the price until the end of the deal."

He added, "It's somewhat unusual but it's part of the intrigue. The fact that they are using the auction to price makes it less likely there will be a one-day pop like in the case of SMIC (Semiconductor Manufacturing International Corp.) But that's not to say that it won't be priced at a premium."

The Mountain View, Calif.-based search engine has picked Credit Suisse First Boston and Morgan Stanley to handle what may well be one of the largest securities offerings in history.

If the Google IPO is a big hit, ultimately it will signal potentially favorable conditions for other Net- and tech-related IPOs as well.

Since its start six years ago, the company has busied itself growing in usership and perfecting its business model. At question is how successful Google has been as an advertising-driven company. Estimates of Google's current revenues previous to Thursday's SEC disclosures ranged from $500 million to $1 billion a year, according to various analysts. The majority of the company's revenue is advertising-driven.

Net advertising is back up after a marked drop post-2000. The Interactive Advertising Bureau and PricewaterhouseCoopers reports that Internet advertising sales for the final quarter of last year were $2.2 billion, a quarterly record.

Overall, Net advertising totaled $7.3 billion last year, a 21 percent jump.

The Net advertising industry is still making up for lost time, however, with last year's total still shy of the 2000 record of $8.08 billion.

Still, Google's IPO comes at a time when Net advertising is on the upswing and has come of age, with proven models demonstrating how to reach the myriad of Netsurfers who use the medium on a daily basis.

Currently a privately-held company, Google's major funding partners include the investment firms of Kleiner Perkins Caufield & Byers, and Sequoia Capital. Other investors include Stanford University; Andy Bechtolsheim, co-founder of Sun Microsystems and current vice president at Cisco Systems; and Ram Shriram, who has held the positions of president of Junglee and vice president of Business Development at Amazon.com.

Started six years ago by two enterprising Stanford students -- the same school which brought the world Yahoo -- Google quickly gained in the search ranks by virtue of its "page ranking" system which often made for more successful and accurate searches. Founders Ph.D computer science candidates Sergey Brin and Larry Page formulated the page-ranking algorithm while still in school, surmising, among other factors, that pages which linked to more often (more popular) were greater sources of information.

Danny Sullivan, the editor and publisher of the searchenginewatch.com Web site, told UPI in a previous interview how Google quickly advanced over fellow search engines.

"Google was fortunate to come along with a better system of producing search results at a time when its competitors were getting lost in the morass of being portals. They forgot that quality search was something visitors wanted. It gave Google an opportunity, and searchers have since flocked to it," Sullivan told UPI. "Today, now that its competitors have learned how much revenue search can produce, they've greatly improved. Google is still the market leader, but it's competition is much closer."

Since its launching, Google has grown to host an estimated 250 million searches daily, according to the searchenginewatch.com Web site.

The search engine has worked its way into popular vernacular with the verb "to Google" someone, meaning to look up their background information. Particularly on the dating scene, "to Google" has proved a popular facet of the dating ritual.


(Reported with Leah Krauss.)

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