Google stumbles with first earnings miss

update Revenue meets analyst expectations at $1.29 billion, but stock gets hammered in after-hours trading.

A correction was made to this story. Read below for details.
Google's honeymoon with the stock market took a breather on Tuesday as the search giant missed earnings 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 earnings that missed analyst estimates, although revenue excluding traffic acquisition costs, or commissions paid to content partners, at $1.29 billion, rose from the same period a year ago and was in line with expectations.

Gross revenue was $1.92 billion, up 86 percent from a year ago.

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

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Despite Google missing investor expectations for earnings per share, company CEO Eric Schmidt said during a fourth-quarter earnings conference call that he was very pleased with results.
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Google's earnings 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 percent since its last earnings report, closing at $432.66 on Tuesday, giving it a market capitalization of about $127 billion.

In after-hours trade on Tuesday, however, the stock fell as much as 19 percent, a loss of more than $24 billion in market value, before easing later in the day. The stock was trading at $381.50, down nearly 12 percent, at 5:38 p.m. PST.

Despite the fact that the company missed analyst estimates on earnings, executives said they were pleased with the results, particularly the fact that increased seasonal growth in traffic and monetization boosted revenue. The company is focused on the continued growth opportunities in Internet advertising and in international sales, said Chief Executive Eric Schmidt.

"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," he told analysts in the conference call. "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 Web sites. Advertising on Google-owned sites generated 57 percent of total revenue, while partner sites generated 42 percent.

For the full year, Google posted revenue of $6.14 billion, up more than 92 percent from 2004, with net income at $1.465 billion from $399 million 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 $175 million 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.

"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," Schmidt said. "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."

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In response to an analyst's question, Schmidt said his company will rely on partners for hardware and software applications while remaining focused on Internet services for multiple platforms.
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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. "I would expect this sell-off to continue tomorrow," said Scott Devitt of Legg Mason Wood Walker. "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 percent 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. "The company's business is very strong. The growth was not slower, but still much faster than the (overall) market," he said. "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 percent last June to 46.3 percent 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 percent to 16.5 billion in December.

Google had beaten analyst estimates in previous quarters. Last quarter,

This month the company made headlines for its policies on how it handles data and government requests for users' activity on the site. It was hailed for rejecting a Justice Department subpoena for information on user Web searches that rivals Yahoo, Microsoft and America Online complied with. However, its decision to has been widely criticized.

Correction: This story incorrectly stated the revenue excluding traffic acquisition costs.
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