Google tastes Wall Street's wrath for the first time

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Wall Street turned against its darling Google Inc. on Tuesday after the search engine operator reported fourth-quarter financial results that turned off investors.

Although Google’s revenue and net income both rose by more than 80 percent in the quarter, which ended Dec. 31, 2005, the Mountain View, California, company missed the consensus earnings-per-share forecast of financial analysts polled by Thomson Financial.

The consensus forecast had been for pro forma earnings per share of US$1.76, but Google reported only $1.54 on that basis. Pro forma earnings per share exclude certain items.

Google met analysts’ $1.29 billion revenue consensus expectation, excluding money it pays to third-party affiliates of its online ad network.

Total revenue grew 86 percent to US$1.92 billion compared with last year’s fourth quarter. Net income according to GAAP (generally accepted accounting principles) increased 82 percent to $372 million, or $1.22 per share.

At press time, the stock (GOOG) was down 12.6 percent at $377.99 in after-hours trading, having recovered some lost ground after an initial sell-off that took it down almost 20 percent.

This is the first time Wall Street has roughed up Google’s stock, which has been appreciating steadily since the company’s shares began trading publicly on the Nasdaq exchange in August 2004. Google’s stock closed at $100.34 on its first day of trading and has seemed unstoppable, particularly when it closed north of $400 for the first time in November of last year. Its 52-week high is $475.11.

Google is different from most publicly traded companies in that it doesn’t provide guidance on what it expects its revenue and earnings to be in its current and future quarters. Consequently, expectations from financial analysts vary widely in Google’s case.

Google’s top executives said in a conference call to discuss the results that they were extremely happy with the company’s financial performance during the fourth quarter.

“We had very strong growth in our core search and core ad business,” said Google Chairman and Chief Executive Officer Eric Schmidt.

“We’re very pleased with our Q4 results. We’re investing aggressively in our business and scaling rapidly to pursue enormous opportunities for long-term growth,” said Chief Financial Officer George Reyes.

Google experienced strong revenue growth internationally in Europe, Asia and Latin America and plans to continue beefing up its operations abroad, Reyes said.

“We continue to see international expansion as a key area of opportunity and investment. We remain underpenetrated in several markets and are focusing our efforts on building out our infrastructure to bring more localized products to these markets,” he said.

Executives noted that Google got hit with a higher-than-expected tax rate of 41.8 percent during the quarter, because its proportion of total expenses allocated to international operations was greater than anticipated. Consequently, profits were taxed at a higher domestic tax rate, they said.

Google-owned Web sites, such as, generated 57 percent of the quarter’s revenue while the rest came from other companies that carry ads sold by Google and that split that revenue with the search engine giant.

Google ended 2005 with 5,680 full-time employees, compared with 3,021 at the end of 2004.

This story, "Google tastes Wall Street's wrath for the first time" was originally published by PCWorld.

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