Google's earnings nearly double


Published: Wednesday, February 1, 2006 at 6:01 a.m.
Last Modified: Tuesday, January 31, 2006 at 10:44 p.m.
SAN FRANCISCO - Google Inc.'s rapid financial growth decelerated in the fourth quarter as the online search engine leader's profit fell below analyst expectations for the first time since its August 2004 initial public offering. The news rattled previously bullish investors, causing Google's stock price to plunge by more than 12 percent.
The Mountain View, Calif.-based company said Tuesday that it earned $372.2 million, or $1.22 per share, for the final three months of 2005. That represented an 82 percent increase from net income of $204.1 million, or 71 cents per share, in the previous year.
If not for a donation to launch its charitable foundation and stock compensation expenses, Google said it would have earned $1.54 per share. That missed the average estimate of $1.76 per share among 31 analysts surveyed by Thomson Financial.
Google released its results after the stock market closed Tuesday. Company shares plummeted $53.61 - 12.4 percent - in after-hours trading after gaining $5.84 to close at $432.66 Tuesday on the Nasdaq Stock Market. The shares had fallen by as much as 19 percent earlier.
The investor backlash also stung Google's two biggest rivals, Yahoo Inc. and Microsoft Corp. Yahoo's shares fell 58 cents, or 1.7 percent, after shedding 68 cents to close at $34.38 on the Nasdaq, where Microsoft's shares gained 15 cents to close at $28.15 before retreating by 19 cents in after-hours trading.
Revenue for the period totaled $1.92 billion, an 86 percent increase from $1.03 billion in the prior year. After subtracting commissions paid to Google's advertising partners, the company registered fourth-quarter revenue of $1.29 billion, matching analyst expectations, according to Thomson Financial.
CEO Eric Schmidt told analysts during a Tuesday conference call that the fourth-quarter results topped the company's internal projections. "We are very pleased with the performance on every level," he said.
Google's management has steadfastly refused to publicly project its earning potential, making it difficult for analysts to reach the calculations that investors use to appraise a company's value.
The company would have matched the average analyst estimate if not for a much higher tax rate during the fourth quarter, Chief Financial Officer George Reyes said during an interview Tuesday.
Google's effective tax rate in the fourth quarter was nearly 42 percent, well above the roughly 30 percent rate during the second and third quarters. The company got stuck with the higher bill because more of its fourth-quarter profit was taxed in the United States instead of in Ireland, Reyes said. Google expects its 2006 tax rate to be about 30 percent.
Substantially higher expenses also weighed on Google's earnings. For instance, the company spent $155 million on sales and marketing during the fourth quarter, more than doubling the $76 million spent last year. The company also hired nearly 700 more workers during the fourth quarter, expanding its payroll to 5,680 employees.
Management has emphasized that the company's expenses are likely to rise as it invests in projects designed to improve its long-term competitive position.
The company's sales growth also slowed in the fourth quarter, a development that is expected to continue as Google matures. Excluding ad commissions, Google's fourth-quarter revenue rose by 23 percent from the third quarter. In 2004, Google's fourth-quarter revenue increased by 30 percent from the third quarter.
Google's fourth-quarter letdown marks the first major test of Wall Street's appetite for a stock that investors had been hungrily buying while the company churned out an uninterrupted string of pleasant earnings surprises.
The company's earnings had exceeded analyst estimates by at least 14 cents per share in each of its previous five quarters since its much-ballyhooed IPO. Google's quarterly profits had at least doubled in each of those quarters, too.
The robust performance had helped establish Google as one of the nation's most valuable companies, with its stock trading as high as $475.11 earlier this month. Most industry analysts have continued to recommend buying the stock, predicting the shares would climb above $500 and perhaps reach $600 by year's end.
But some investors began to fret about Google's earnings momentum two weeks ago when Yahoo released a fourth-quarter profit that fell a penny below analyst estimates. That news raised fears that the Internet's advertising market didn't expand as much as most people anticipated during the pivotal holiday shopping season.
The jitters surrounding Google were exacerbated after the company vowed to fight a Bush administration subpoena demanding one week's worth of search requests as the federal government seeks to revive a law designed to shield children from online pornography.
Google then provoked more angst last week by launching a new search engine in China that will censor some results to comply with the country's free-speech restrictions.

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