Google's first profits-miss hits shares

Google's honeymoon with the stock market took a breather on Tuesday as the search giant missed profits expectations for the first time since it went public in 2004, sending its stock price into an after-hours trading spiral.

The company posted fourth-quarter profits that missed analyst estimates, although revenue, at $1.29bn, rose from the same period a year ago and was in line with expectations.

Excluding traffic acquisition costs, or fees paid to partners, the company's revenue was $1.92bn, up 86 per cent from a year ago.

Profits per share for the quarter were $1.22, or $1.54 per share excluding one-time items, including stock-based compensation charges and a donation to the philanthropic Google Foundation. That compared with 71 cents per share a year ago. On that basis, analysts had been expecting profits per share of $1.76.

Google's profits per share would have been $1.78 if the tax rate in the quarter had not been higher than expected, chief financial officer George Reyes said in a conference call with analysts.

Google's share price has more than doubled in the past year and risen more than 40 per cent since its last profits report, closing at $432.66 on Tuesday, giving it a market capitalisation of about $127bn.

In after-hours trade on Tuesday, however, the stock fell as much as 19 per cent, a loss of more than $24bn in market value, before easing later in the day. The stock was trading at $381.50, down nearly 12 per cent, at 17:38(PST).

Despite the fact the company missed analyst estimates on profits, executives said they were pleased with the results, particularly the fact that increased seasonal growth in traffic and monetisation boosted revenue. The company is focused on the continued growth opportunities in internet advertising and in international sales, said chief executive Eric Schmidt.

He told analysts in the conference call: "Most important, we believe the rate of innovation will increase in 2006 as we continue to bring the most talented minds into Google and our unique innovative model delivers amazing new products. So we take the long-term view of business and we are going to invest for the long-term and make some really big bets."

Almost all of Google's revenue comes from advertisements that appear on search result pages and on partner websites. Advertising on Google-owned sites generated 57 per cent of total revenue, while partner sites generated 42 per cent.

For the full year, Google posted revenue of $6.14bn, up more than 92 per cent from 2004, with net income at $1.465bn from $399m a year earlier.

The number of full-time Google employees jumped to 5,680 at the end of 2005, up from 3,021 at the end of the year before.

Over the next three years, Google expects to invest $175m in for-profit companies that are progressive environmentally, socially or economically, Reyes said.

In response to an analyst question about reports that Google is planning to move into the hardware or desktop software market, Schmidt said the company would continue to team with its hardware and software partners and focus on providing multiplatform internet search and services instead.

Schmidt said: "There has been an awful lot of speculation about Google playing in those markets, Google PC. To me, most of those are people projecting the last war, not the next opportunity, on us and from my perspective those are not very interesting business opportunities. They are well covered in the market. We partner with many of the players. We would much prefer to partner with them than to go into competition with them."

The internet ad and service market Google is making money off is large, he said. "It makes no sense to divert our resources to these much smaller opportunities."

Analysts were mixed on whether the Google stock sell-off would continue through Wednesday or level off. Scott Devitt of Legg Mason Wood Walker said: "I would expect this sell-off to continue tomorrow. It will be an interesting day in the internet sector tomorrow. I can guarantee you that."

Devitt said he had changed his rating on Google to "sell" from "hold" the day after Yahoo! posted fourth-quarter net income that missed analyst expectations, sending its share price down more than 12 per cent in after-hours trading.

Safa Rashtchy of Piper Jaffray said he thought people could see the lower Google stock price as a good buying opportunity. He said: "The company's business is very strong. The growth was not slower but still much faster than the [overall] market. I don't think this was a disappointing quarter at all. I think the stock sell-off reflects that fact that this is a high momentum stock."

Google's position in search continues to grow. Its share of searches grew from 45.7 per cent last June to 46.3 per cent in November, when it had 2.4 billion searches, according to Nielsen/NetRatings. During the fourth quarter its impressions of sponsored search links rose 12 per cent to 16.5 billion in December.

Google had beaten analyst estimates in previous quarters. Last quarter, Google's revenue nearly doubled from a year earlier and profit rose to $1.32 per share, driving the company's shares up 12 per cent and prompting analysts to raise their 2006 target prices.

Elinor Mills writes for CNET News.com