Google falls below expectations

January 31, 2008 5:54:02 PM PST
Google Inc.'s earnings and revenue growth decelerated more than analysts anticipated during the fourth quarter, magnifying worries that the Internet search leader's moneymaking machine is bogging down as the U.S. economy teeters on the brink of recession.

The quarterly results released Thursday spooked already jittery investors, causing Google's slumping stock price to plunge 6.5 percent farther.

Google earned $1.21 billion, or $3.79 per share, during the final three months of 2007. That's up 17 percent from net income of $1.03 billion, or $3.29 per share, in the same period a year earlier.

It's the first time Google's quarterly profit has climbed by less than 25 percent since the Mountain View-based company went public nearly 3½ years ago.

If not for stock awards given to its employees, Google said it would have made $4.43 per share - a penny below the average estimate among analysts polled by Thomson Financial.

The earnings would have been even lower if Google hadn't benefited from an abnormally low tax rate of 25 percent in the quarter. American Technology Research analyst Rob Sanderson estimated Google would have earned 11 cents less if the company had been taxed at its more typical rate of 27 percent.

Chief Executive Eric Schmidt rebuffed the notion that the feeble U.S. economy undercut Google's growth.

"I am happy to say we have not seen a negative impact from the rumors of a future recession," Schmidt told analysts during a Thursday conference call.

Company co-founder Sergey Brin said in an interview that the company hasn't seen evidence of the recent economic turmoil affecting its business.

"I'm very happy with things," Brin said. "I think things are going really well."

Investors apparently don't share Brin's optimism. Concerns about the crumbling economy denting Google contributed to a nearly 20 percent decline in the company's stock price this month. Now it looks like the sell-off will continue as the calendar turns to February.

Google shares rose $16.03 to finish at $564.30 in Thursday's regular session then plunged $36.90 in extended trading after the fourth-quarter results came out.

Google executives said a revision in the company's formula for showing advertising links crimped the fourth-quarter results by reducing the number of revenue-generating clicks. Without providing details, the executives said Google made the change to decrease the frequency of "accidental" clicks on ads.

Total paid clicks in the fourth quarter rose 30 percent from the same 2006 period. In the first three quarters of 2007, Google's paid clicks were rising at a clip of 45 to 52 percent.

Brin and other executives also said Google didn't reap as much revenue as management envisioned from its advertising partnerships with rapidly growing online social networks like News Corp.'s MySpace.

Management didn't quantify the size of the shortfall, but Brin said engineers are addressing the problem.

Google has guaranteed News Corp. payments totaling $900 million during a three-year contract scheduled to end in 2010, so it can lose money if ads on MySpace aren't paying off on MySpace.

Fourth-quarter revenue totaled $4.83 billion, a 51 percent improvement over $3.21 billion in the previous year.

In a more important measure to investors, Google retained $3.39 billion in revenue after paying fees to the thousands of Web sites in the online advertising network that fuels its profits.

The net revenue missed analyst estimates by about $60 million.

Google's fourth-quarter performance would make most companies envious.

But Google's market value of $175 billion has been built on the premise that it will consistently produce even more robust profit gains as advertisers shift their spending to the Internet from television, radio, newspapers and magazines.

Google generally only gets paid when Web surfers click on an advertising link on its site and other online destinations. So its growth could taper off if consumers become less inclined to click on ads if they become more because they're more reluctant to spend amid signs of a recession.

But Google also could benefit if consumers become more focused on saving money during hard times, according to Jonathan Rosenberg, the company's senior vice president of product management and marketing.

In Thursday's conference call, Rosenberg painted a scenario in which more consumers will turn to the Internet in search of the best deals - a quest that will lead them to Google and perhaps induce more revenue-producing clicks on ads.

For all of 2007, Google earned $4.2 billion, or $13.29 per share, a 37 percent improvement over $3.1 billion, or $9.94 per share, in 2006. Revenue in 2007 totaled $16.6 billion, a 56 percent increase from $10.6 billion in 2006.