In a measure of the extraordinarily high expectations investors have for Google, the Internet giant reported that quarterly profit soared above $1 billion for the first time -- and disappointed investors promptly sold the stock.
Google rose $7.18 during regular trading to close at $501.50. But as soon as fourth-quarter earnings were reported, the stock began falling. It was trading at $494.69 late Wednesday afternoon.
The Mountain View company said earnings per share jumped from $1.22 in the same period a year ago to $3.29 as profit rose 177 percent to $1.03 billion.
Excluding tax gains and stock-option expenses, Google earned $3.18 a share -- more than the $2.92 analysts had figured based on past growth, keyword pricing, industry trends and other data.
Revenue was up 67 percent to $3.2 billion, also higher than the $2.19 billion that analyst polled by Thomson Financial said they were expecting.
But it turned out that investors -- used to almost 10 quarters of jaw-dropping performance -- were actually hoping for a more Google-size surprise.
Martin Pyykkonen of Global Crown Capital said "everything was fundamentally fine" with Google's performance but that analysts like himself have gotten much better at calculating the growth of Google's business. "That can be healthy for the stock," he said. "It can reduce volatility."
Unlike many technology companies, Google does not provide analysts with guidance about how much it expects to earn in a year or a quarter. During its first year as a public company, analysts regularly underestimated how fast the company was growing. Google's quarterly surprises were rocket fuel to its stock price, which has quintupled since the company went public in August 2004, Mercury News reports.
Chief Executive Officer Eric Schmidt is looking beyond the small text links that appear next to search results for the next wave of growth. Google bought YouTube Inc. for $1.65 billion in November to tap the video-ad market, and has tested ad sales in 50 newspapers and on radio.
Sales growth from Google's own Web sites outpaced gains on partners' sites. Ad revenue from Google Web sites rose 80 percent to $1.98 billion in the quarter, while the company's ad sales on other sites rose 50 percent to $1.2 billion.
Schmidt, 51, said improvements to Google's advertising software meant more people clicked on ads, even though the company showed fewer ad links next to search results. Total advertising clicks rose 61 percent from a year earlier, Bloomberg reports.
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, the AP reports.
Prepared by Alexander Timoshik
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