Google Earnings Badly Miss Expectations; Shares Tumble

SAN FRANCISCO – Google Inc.'s (GOOG) rapid financial growth decelerated in the fourth quarter as the online search leader's profit fell below analyst expectation for the first time since its August 2004 initial public offering. The news rattled previously bullish investors, causing Google's stock price to plunge by more than 15 percent.

The Mountain View, Calif-based company said Tuesday that it earned $372.2 million, or $1.22 per share, for the final three months of 2005. That represented an 82 percent increase from net income of $204.1 million, or 71 cents per share, in the previous year.

If not for a donation to launch its charitable foundation and stock compensation expenses, Google said it would have earned $1.54 per share. That missed the average estimate of $1.76 per share among 31 analysts surveyed by Thomson Financial.

Google released its results after the stock market closed Tuesday. Company shares plunged $66.93 — 15.5 percent — in after-hours trading after gaining $5.84 to close at $432.66 Tuesday on the Nasdaq Stock Market. The downturn wiped out roughly $20 billion in shareholder wealth.

The investor backlash also stung Google's two biggest rivals, Yahoo Inc. (YHOO) and Microsoft Inc (MSFT). Yahoo's shares fell 83 cents, or 2.4 percent, after shedding 68 cents to close at $34.38 on the Nasdaq, where Microsoft's shares gained 15 cents to close at $28.15 before retreating by 21 cents in after-hours trading.

Google's revenue for the period totaled $1.92 billion, an 86 percent increase from $1.03 billion in the prior year. After subtracting commissions paid to Google's advertising partners, the company registered fourth-quarter revenue of $1.29 billion, matching analyst expectations, according to Thomson Financial.

CEO Eric Schmidt told analysts during a Tuesday conference call that the fourth-quarter results topped the company's internal projections. Management has steadfastly refused to publicly project its earning potential, making it difficult for analysts to reach the calculations that investors depend on for appraising a company's value.

A much higher tax rate during the fourth quarter accounted for the bulk of Google's earnings shortfall, Chief Financial Officer George Reyes said during the conference call.

The company's effective tax rate in the fourth quarter was nearly 42 percent, well above the roughly 30 percent rate during the second and third quarters. Google also expects its 2006 tax rate to be about 30 percent.

Google's fourth-quarter letdown marks the first major test of Wall Street's appetite for a stock that investors had been hungrily buying while the company churned out an uninterrupted string of pleasant earnings surprises.

The company's earnings had exceeded analyst estimates by at least 14 cents per share in each of its previous five quarters since its much-ballyhooed IPO. Google's quarterly profits had at least doubled in each of those quarters, too.

The robust performance had helped establish Google as one of the nation's most valuable companies, with its stock trading as high as $475.11 earlier this month. Most industry analysts have continued to recommend buying the stock, predicting the shares would climb above $500 and perhaps reach $600 by year's end.

But some investors began to fret about Google's earnings momentum two weeks ago when Yahoo released a fourth-quarter profit that fell a penny below analyst estimates. That news raised fears that the Internet's advertising market didn't expand as much as most people anticipated during the pivotal holiday shopping season.

The jitters surrounding Google were exacerbated after the company vowed to fight a Bush administration subpoena demanding one week's worth of search requests as the federal government seeks to revive a law designed to shield children from online pornography.

Google then provoked more angst by launching a new search engine in China that will censor some results to comply with the country's free-speech restrictions.