Google missed widely on Wall Street's earnings expectations for the quarter ended September 30, 2004, its first quarterly financial report after launching its initial public offering.

Net income came in at $52 million, or $0.19 per share, compared with $20.4 million, or $0.08 per share, in 2003's third quarter. Net income before certain non-recurring items was $125 million or $0.45 per share, significantly below the $0.56 per share consensus expectation from analysts polled by Thomson First Call.

Google reported $805.9 million in revenue in 2004's third quarter, an increase of 105 per cent over the same quarter last year. Excluding traffic acquisition costs (TACs), which is revenue Google pays to its partners, revenue came in at $503 million, exceeding analysts' expectation of $456 million.

Google's stock (GOOG) started trading on August 19 on the Nasdaq Exchange. Since then, the lowest price for the stock has been $95.96 and the highest $152.40. Its IPO price was $85.

The stock closed at $149.38, up 6.33 per cent, on Thursday before the earnings report.

Only just begun

"It's clear to us that we have only begun work on our mission to organize the world's information and make it universally accessible and useful. Only a fraction of the world's information is indexed on our computers. We are perpetually working on ways to grow our indexes and developing new technologies for collecting and serving up the world's information," said Larry Page, co-founder and president of products, in a conference call to discuss the financial results.

Google is also actively reaching outside the search space. In July, it bought Picasa, which makes software for organizing and managing digital photos and runs a peer-to-peer network for sharing digital photos. In April, it announced a Web mail service called Gmail, which is still in test mode. Last year, it acquired the Blogger Web log service when it bought Pyra Labs. Recently, rumors have swirled that Google might be developing a Web browser and an instant messaging service.

Industry observers have pointed out that Google needs to broaden its scope to diversify its revenue stream and be in a better position to compete against rivals such as Yahoo, America Online Inc. and Microsoft. All three are moving aggressively to increase their share of the fast-growing and profitable sponsored search space.

Adding up

In the second quarter, overall Internet ad spending was about $2.37 billion, a 42.7 per cent increase over same period in 2003, according to a report issued in September by the Internet Advertising Bureau and Pricewaterhousecoopers. Search-related ads were the largest category with $947 million, according to the report. Display ads followed in a distant second place with $474 million. Classifieds came in third with $403 million.

"While some have expressed concern about our reliance on online advertising, we believe this market is very large and that we are at its infancy," Page said. "Technology innovations will make online advertising only more effective and desirable over time. This is due to innovations that continually increase the relevancy of ads" for users and advertisers. For example, Google has recently begun testing the delivery of ads in its image search service, Page said.

Google is also focusing on expanding its international presence, said Sergey Brin, co-founder and president of technology. He and Page recently returned from a two-week trip abroad during which they opened the company's new European headquarters in Dublin and visited several countries in Asia, he said. "We see great opportunities all around the globe," Brin said, adding that Google's international operations generated 35 per cent of the revenue this quarter, up from 31 per cent last quarter.