Looks like another blow-out quarter for Google, exceeding even the most optimistic analyst estimates. Check here and here for the full story, but let me highlight a few things that the mainstream press doesn't always appreciate.

(You can check my math yourself, though Google doesn't make it easy. The most relevant measure of revenue is net of traffic acquisition cost, what Google pays partners to show ads. Google doesn't calc this for you, so you have to subtract TAC from revenue yourself. To just look at gross revenues would be like eBay taking credit for the total value of products traded on its site, even though it only takes a transaction fee on each sale. Google's reporting the way the accountants insist, but it's not very relevant to an investor evaluating the business.)

1. Growth and margin. Google is such a strong story because of the combination of growth and margin. They've been warning since the IPO that growth rates will fall and margins will shrink as they become larger, and that only stands to reason. But instead we've seen growth rates accelerating, and margins expanding, which is truly extraordinary for a $50 billion company.

For all of 2004, revenue net of traffic acquisition cost (TAC) was up 108.7% over 2003. While you would expect that the growth rate would decelerate, net revenue in the quarter ended March 31 '05 was 108.9% higher than the first quarter '04.

And even more impressively, any way you slice margins, they're up dramatically -- so Google is keeping more of every dollar of revenue now than they were a year ago. Cash flow from operations this quarter was 66% of net revenue (!!!), up a full 1000 basis points just from last quarter and from the first quarter of '04 -- they're simply blowing the doors off. Net income is up 1500 basis points over last quarter, cash flow margin is up 1000 basis points, and free cash flow is up 1600 basis points over 1Q04 even though Google spent a whopping $142 million on new computer hardware and facilities just this quarter.

In contrast, Google is growing twice as fast as Yahoo and much more profitably, with margins that are more than double Yahoo's. Yahoo's revenue (ex-TAC) grew 52% over last year (compared with Google's 108.9%) and operating cash flow was 42% (compared with Google's 66%). Google's profitablity is much higher, and improving faster than Yahoo, with operating margin increasing from 24% in 1Q04 to 35% this quarter. Yahoo's operating margins increased, from the same 24% in 1Q04 but only to 30% this quarter.

Yahoo's favorite metric is free cash flow, and I like it a lot too. For a capital-intensive business like Google and Yahoo, or even your local cable company, you want to know how much cash is left over after paying for normal operations and after investing in new equipment. Yahoo's free cash flow as a percentage of revenue ex-TAC was 35.9% in 2004's first quarter, and increased to 38.7% -- a terrific performance. Google started lower last year at 32.1%, and pumped it up 1670 basis points to 48.7% this quarter.

Google pays partners for traffic acquisition, and for every dollar left over, they use 51.3 cents for sales, marketing, admin, R&D, to run the data centers, and to invest in new facilities and equipment -- and still have 48.7 cents in cash left over. For all of last year, Google had $658 million in free cash flow, and they've already put more than half that number on the board in just the first quarter of this year.

So Google is growing much faster and keeping more of every revenue dollar than its nearest competition. These are solid reasons for a high multiple on the stock, if you believe that the music will keep on playing.

2. Capital expenditures. Google expects to spend $500 million this year, primarily to add new computer hardware. This is a gigantic number. To put it in perspective, it's more than Google spent in the last 2 years combined. And it's even more significant when you consider that hardware is at least twice as powerful now as it was two years ago.

Just this quarter, Google spent more on new computer hardware than it did in the last half of '04.

This kind of investment seems much too high just to keep up with the growth of existing services. And on today's conference call, Google execs hinted at their plans. They said they wouldn't be using their $2.5 billion cash balance (which is growing 15%-17% each quarter) to buy back shares. Instead, they have some "very interesting things to do with the cash over the next year or two." At another point, Larry Page said, "what we've done for the web, Google wants to do for television."

3. Just the beginning. Eric Schmidt said several times on today's conference call, as he has on past calls, that Google is just at the beginning of their opportunities. He says they're seeing "no saturation" in their markets, that there's "plenty of upside."