Google Stock Drops Despite 4Q Earnings

MICHAEL LIEDTKE / AP 1feb2007

[More on Google]

Google Inc.'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 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."

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 percent, in extended trading.

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 to 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 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 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, 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 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 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.

source: http://www.forbes.com/feeds/ap/2007/02/01/ap3383981.html 3feb2007

Google profit nearly triples, sales pass estimates

Shares fall slightly in premarket action despite strong results 

BEN CHARNY / MarketWatch 1feb2007

NEW YORK — Google Inc. late Wednesday reported fourth-quarter profit nearly tripled, while sales rose 67%, as the No. 1 Internet search engine captured a greater share of online advertising spending.

For the period ended Dec. 31, Google said net income surged to $1.03 billion, or $3.29 a share, from $372 million, or $1.22 a share, a year earlier.

The results topped the estimates of Wall Street analysts surveyed by Thomson Financial, who expected earnings of $2.92 a share.

Sales surged to $3.21 billion, driven by explosive growth in Google's business of placing text-based advertisements alongside its Internet search results.

Excluding the payments Google makes to its advertising partners, sales rose more than 70% to $2.23 billion, slightly higher than analyst estimates.

"Google's results were strong, indicating a robust search market, market share gains and excellent execution," said Citigroup analyst Mark Mahaney, who rates Google shares a buy.

The company's gross profit margin fell slightly, however, as Google increased investment in new businesses. Concerns about rising expenses contributed to a premarket decline in Google shares, which slipped 1.5% Thursday to $494.32.

Yet most analysts reiterated buy ratings or even lifted their stock-price targets, finding little to dislike in the company's latest results.

"We fully recognize that the party at Google has to end some time," Derek Brown of Cantor Fitzgerald told clients. "Yet we see no obvious signs that Google's business has hit the proverbial wall or that consumers and advertisers are radically shifting their behavior away from Google and toward its competitors."

During the quarter, Google took an ever-greater share of the online ad business, which is booming as more traditional retailers shift ad spending to the Internet. Online ad spending grew 25% last year to $17 billion, according to the research firm eMarketer.

At the same time, the company's technology for ranking online search ads continues to generate more dollars per search than rivals like Yahoo Inc. and Microsoft Corp.'s MSN unit.

More consumers are using Google searches to help them shop online. The company's share of U.S.-based Internet searches climbed to 47% during the quarter, up from 30% a year ago, while its share outside the U.S. spiked to about 70%, according to the latest data from comScore Networks Inc.

During the past 12 months, Google shares have risen about 18% versus a 6% gain in the Nasdaq Composite Average, and the stock is up nearly sixfold since its August 2004 initial public offering. Google shares hit a record high of $513 on Jan. 16.

Strength overseas and on Google's own sites

During the quarter, Google's core business of providing Internet search ads was thriving. Sales through its own sites generated about $2 billion, an 80% jump from last year. Meanwhile, the fees paid by Google's advertising partners generated $1.2 billion in sales, up 50%.

The company is benefiting from strong growth overseas. International sales represented 44% of Google's total, compared to 38% a year earlier. Google said more than half of its Internet traffic now comes from overseas.

"We are gaining share in nearly every country," Chief Executive Eric Schmidt said in a conference call.

While it was the first quarter that included results from YouTube, the video-sharing site acquired by Google last fall, company executives declined to give a figure for its revenue contribution. Analysts believe YouTube contributed negligible sales.

Google did say it plans to start sharing revenue with some consumers who post videos to YouTube, confirming an earlier media report.

By sharing revenue, Google hopes to attract better-quality videos with which advertisers would want to be associated. The revenue sharing program should begin "sometime this year," Schmidt said, adding that there's "no formal program yet. This year, we will begin offering such programs."

The company also said it would record a charge of approximately $90 million in the second quarter related its conversion to a new employee-options program. Assuming a stock price of $494 a share, Google will take additional charges worth about $160 million during the next four years for the program, which will allow employees to sell unvested stock options.

Great quarter, now what?

On the company's conference call, Google executives were quizzed mainly on what new, potentially revenue-generating initiatives are in the pipeline.

For all its strong points, Google is in a sense a one-trick pony. It generates most of its revenues selling Internet advertising. For the past several years, Google's been searching for new revenues streams not related to Internet search.

One is Google Checkout, an online payment feature Google introduced last year. Checkout is viewed as a major competitor to eBay Inc.'s PayPal online payment feature.

For now, Checkout's contribution appears murky. While it does not seem to be generating any direct revenue, some Checkout adopters have been boosting their Google ad spending, Schmidt added.

But it's also a kind of loss-leader. During the conference call, Google Chief Financial Officer George Reyes indicated that what Google has spent promoting the new feature - including processing all transactions for free this year - amounted to about 1% of Google's revenue. Reyes didn't elaborate.

Television advertising is another new initiative. Google's already begun experimenting with selling TV ads. But to really attack this new market, Google's Schmidt hinted Wednesday that the company's ready to begin working with the makers of Internet-enabled, cable set-top boxes.

As to Internet search on cell phones, another potentially lucrative area for Google, Schmidt said some new mobile search features from Google "aren't really driving revenue yet." But investment continues.

"We are making a significant investment in technology around mobile because of the growth rate of mobile and the ultimate scale of that business," he said. "You won't really see its financial impact until 2008."

Ben Charny is a MarketWatch reporter based in San Francisco.

source:  3feb2007

Google's Gains May Be Too Hot

Net Surges,
But Concerns Rise of Prospect of
Growth Putting a Drag on Margins 

KEVIN J. DELANEY / Wall Street Journal 1feb2007

Google Inc. is pulling further away from the pack.

The Mountain View, Calif., company said fourth-quarter profit nearly tripled, largely as a result of improvements in advertising revenue from its core Web-search business, which is far outpacing that of rivals such as Yahoo Inc. and Microsoft Corp.

Still, Google's shares fell following the earnings report. Some analysts raised concerns that rising expenses, including to build up new lines of business, possibly could hurt future profitability. They also said Google's results had been expected to be impressive, and some investors responded tepidly to the earnings report when it failed to produce any significant surprises.

Strong user traffic to Google's Web sites and improvements to its search-ad systems contributed to a 67% rise in revenue to $3.21 billion from $1.92 billion a year earlier. Some research firms estimate that Google's lead widened in the number of user-search queries handled globally.

In the past year, Google has made high-profile investments in areas such as online video, and intensified efforts to broker advertising in print, radio and video. But the company's fourth-quarter results highlighted the continuing importance of its core business of placing small ads alongside Web-search results that are linked to a user's query.

"What is the key to our success? I think it's search," said Chief Executive Eric Schmidt during a conference call with analysts. Google said the number of consumer clicks on its ads rose about 61% from a year ago and 22% from the third quarter. Companies generally only pay Google when a consumer clicks on one of their search ads. As part of continuing efforts to display ads users are more likely to click on, Mr. Schmidt said Google was displaying fewer, more relevant ads for each search query on average.

As in the past, Google incurred significant costs for capital expenses, such as building computer data centers to run its services, and for payments to partners that carry ads brokered by Google. Sergey Brin, a Google co-founder and president of technology, said the company paid partners more than $3 billion in 2006, up from about $2.1 billion in 2005, "and this is a figure that we expect is going to increase as we ramp up our video, radio and print programs."

The company also said the revenue it reported during the quarter was effectively reduced by about $35 million related to a promotion for its Checkout online-payment processing service. The service, launched last year, facilitates payments by consumers to online retailers.

Some analysts cautioned that Google's expansion into markets such as Internet video and the Checkout service could weigh on its profitability. "The expense required to enter these markets is quite high, pressuring margins," said Jordan Rohan, an analyst at RBC Capital Markets Corp. in New York, whose firm makes a market in Google shares. "There will be greater variability in profit margins in 2007 than there was in prior years." Mr. Rohan said Google's per-share profit for the latest quarter fell below his forecasts when certain tax considerations were factored out.

"The company is plenty profitable," said Mr. Schmidt in an interview. "This is an example of where the analysts are over-obsessing about something."

Google reported results after regular trading hours. In 4 p.m. Nasdaq Stock Market composite trading, Google rose $7.18 to $501.50. In after-hours trading, Google was quoted at $494.44, off 1.4%. Rob Sanderson, Internet analyst at American Technology Research, attributed the after-hours share decline to a lack of a strong positive surprise for investors.

Net: +177%   (GOOG)

	4Q'06	4Q'05
Net: 	1,031	  372
EPS($)‡	 3.29	 1.22
Est($)†  2.92
Sales:  3,205	1,919

Divisional breakdown:
Advert  3,175    1,897
Licen	   31	   22

† Milions of dollars
‡ Analysts' concensus estimate
  provided by Thomson Financial;
  may exclude certain items or
  discontinued operations

Google posted net income of $1.03 billion, or $3.29 a share, up from $372.2 million, or $1.22 a share, a year earlier. Excluding certain stock-based compensation and other factors, Google earned $3.18 a share. Analysts' mean consensus forecast was for earnings of $2.92 a share on that basis, according to Thomson Financial. Some analysts estimated that, factoring out additional considerations related to the company's lower-than-expected tax rate, Google's per-share earnings would have been slightly below $3. Revenue excluding commissions paid to marketing partners totaled $2.23 billion, slightly above analysts' estimates of $2.19 billion.

International operations formed 44% of Google's revenue, the same as in the previous quarter, with Google executives highlighting strength in the French and German markets. Google's staff numbers increased 14% to 10,674 employees as of Dec. 31, up from 9,378 as of Sept. 31.

Mr. Schmidt said Google would "eventually do some very significant deals" related to its online video services, which include YouTube Inc., the Internet video-sharing site Google purchased in the fall for nearly $1.8 billion. People familiar with the matter say Google has been in discussions with television and music companies about licensing their video and music for use on its video services, and at the same time stave off any copyright lawsuits against Google over content uploaded by users without its owners' permission.

The CEO declined to comment on any specific possible deals but said he "wasn't in a great hurry on this issue — it's more important to get it right." He acknowledged copyright concerns but added, "We have answered those by saying we're working very hard on fingerprinting technologies." Fingerprinting technology might allow Google to automatically identify copyrighted audio or video clips in order to remove them or share related ad revenue with content owners, though Mr. Schmidt said, "it's a hard problem."

Google also acknowledged its strong interest in expanding services for businesses, which analysts say could eventually challenge Microsoft's Office applications. Mr. Schmidt said it is clear that Google's Web-based spreadsheet and word-processing services should become part of the applications it bundles for businesses and other organizations, which currently include email, instant messaging, Web-page creation and online calendar services. He said some businesses might choose to pay for non-advertising-supported versions of Google's Web-based applications, which are generally free otherwise.

Still, "on a cost of ownership perspective, we will be much, much cheaper than any other of the alternatives," he said.

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