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Google Earnings Nearly Triple, But Results Didn't Impress

CNBC.com
Thursday, 1 Feb 2007 | 1:30 PM ET

Google's fourth-quarter profit nearly tripled as the online search engine leader once again sprinted past analyst expectations, but the breathtaking growth still wasn't enough to propel its high-flying stock to new heights.

The Mountain View-based company said Wednesday that it earned $1.03 billion, or $3.29 a share, during the final three months of 2006. That compared with net income of $372.2 million, or $1.22 a 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 a share. That figure easily exceeded the average analyst estimate of $2.92 a 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."

The initial reaction among investors, though, was less enthusiastic. Google's shares climbed $7.18 to close at $501.50 on the Nasdaq Stock Market before the earnings came out, then fell by $6.70, or 1.3%, in after hours trading on Wednesday.

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% during the fourth quarter compared to the full-year average of 26%. He estimates Google's earnings would have only been $2.99 a share, or 7 cents above analyst projections, if not for the lower tax rate.

What's more, Google's revenue after paying ad commissions was just $40 million higher than the average estimate. Given Google's commanding lead in Internet search, many investors might have been anticipating bigger 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," Standard & Poor's analyst Scott Kessler. "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 by nearly six-fold from an initial public offering price of $85, minting the eight-year-old 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%, of the $1.2 billion in revenue that flowed from Google's advertising partners. That was up from 79% in the third quarter and a year ago.

In a Wednesday conference call, 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, 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 in interest during the fourth quarter alone.

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

The company's revenue for the period totaled $3.2 billion, a 67% 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% 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% increase posted by Yahoo, which operates the Internet's second-largest advertising network.

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

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

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