Google 4Q Earnings Nearly Triple

Google Inc. has grown into a financial juggernaut so quickly its extraordinary growth is starting to look routine -- a phenomenon making it more difficult for the online search leader to impress investors.

That challenge became more apparent late Wednesday after Google trounced analyst expectations with a fourth-quarter profit that nearly tripled from the year before. The performance also marked the first time Google's quarterly earnings have exceeded $1 billion in its eight-year history.

But those achievements weren't enough to satisfy investors who had driven up Google's stock price by more than $40, or 9 percent, during the first month of the year in anticipation of an even bigger fourth quarter.

"People were expecting unreasonably lofty results," said Standard & Poor's analyst Scott Kessler.

Google shares fell $12.91, or 2.6 percent, to $488.59 in midday trading Thursday on the Nasdaq Stock Market.

For almost any other company, Google's fourth-quarter results probably would have been an overwhelming crowd pleaser.

The Mountain View-based company said it earned $1.03 billion, or $3.29 per share, during the final three months of 2006. That compared with net income of $372.2 million, or $1.22 per share, at the same time in 2005.

After stripping out gains from tax benefits that were partially offset by expenses for employee stock compensation, Google said it would have earned $3.18 per share. That figure easily exceeded the average analyst estimate of $2.92 per share among analysts surveyed by Thomson Financial.

"To be growing this fast at this stage is phenomenal," Eric Schmidt, Google's chief executive officer, said during a Wednesday interview. "Frankly, I could not be prouder of this company."

American Technology Research analyst Rob Sanderson said Google's profit wasn't quite as impressive as it appeared because the company enjoyed an unusually low tax rate of 24 percent during the fourth quarter compared with the full-year average of 26 percent. He estimates Google's earnings would have only been $2.99 per share, or 7 cents above analyst projections, if not for the lower rate.

What's more, Google's revenue after paying ad commissions was just $40 million more than the average estimate. Given Google's commanding lead in Internet search, many investors might have been anticipating greater things.

"Everything was solid, but it wasn't the type of blowout quarter Google has delivered in the past," said Global Crown Capital analyst Martin Pyykkonen.

Even so, "there is no question that this was a very good quarter," Kessler said. "No matter how you look at it, they notably exceeded expectations. It's just that all the good news is already priced into the stock."

To some extent, Google has already spoiled investors by topping analyst expectations in all but one of its 10 quarters as a publicly held company.

During that stretch, Google has earned $4.8 billion on $18.6 billion in sales, translating into a $26 profit on every $100.

The hefty profit margin is one of the reasons that Google's stock has increased nearly six-fold from an initial public offering price of $85, minting the company with a market value of about $150 billion.

But Google's latest operating margins weakened slightly from the third quarter, a development that probably unnerved some investors, Kessler said.

The company's fourth-quarter advertising commissions also devoured a larger chunk of the revenue generated from Google's partnerships with thousands of other Web sites. The commissions chewed up $976 million, or 81 percent, of the $1.2 billion in revenue that flowed from Google's advertising partners. That was up from 79 percent in the third quarter and a year ago.

In a Wednesday conference call with analysts, Google co-founder Sergey Brin indicated the company will share an even larger portion of its revenue as it tries to strike more deals to distribute online video ads. The expansion plans are an offshoot of Google's $1.76 billion purchase of video sharing pioneer YouTube Inc., an acquisition that was completed in the fourth quarter.

Google also plans to begin selling print and broadcast ads as it tries to develop new sources of revenue.

Even as Google tries to maintain its moneymaking momentum to keep shareholders happy, management continues to spend heavily, hiring new employees and building more data centers to support its ambitious plans for the future.

The company nearly doubled the size of its work force last year, expanding its payroll to 10,674 employees through December. Its 2006 capital expenditures totaled $1.9 billion, more than doubling from $838 million in 2005.

Despite all that spending, Google still ended the year with $11.2 billion in cash -- a hoard that helped it earn $124 million, or about 40 cents per share, in interest income during the fourth quarter alone.

The company's fourth-quarter revenue totaled $3.2 billion, a 67 percent increase from $1.92 billion in the prior year.

After subtracting commissions paid to its advertising partners, Google's fourth-quarter revenue was $2.23 billion. That also exceeded the average analyst estimate of $2.19 billion and represented a 20 percent increase from the third quarter.

The sequential change in Google's quarterly revenue is closely watched by investors. Besides exceeding analyst expectations, Google's sequential revenue growth also outpaced the 15 percent increase posted by Yahoo Inc., which operates the Internet's second-largest advertising network.

Through December, Google held a 47 percent share of the U.S. search market, compared with 28 percent for Yahoo, according to comScore Media Metrix.

For all of 2006, Google earned $3.08 billion, or $9.94 per share, on revenue of $10.6 billion. That compared with net income of $1.47 billion, or $5.02 per share, on revenue of $6.1 billion.


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