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Google slowdown no surprise

Shares plunge as CFO says growth of cash-cow online ad sales is slowing.

Elinor Mills Former Staff Writer
Elinor Mills covers Internet security and privacy. She joined CNET News in 2005 after working as a foreign correspondent for Reuters in Portugal and writing for The Industry Standard, the IDG News Service and the Associated Press.
Elinor Mills
4 min read
Google shares tumbled Tuesday after the company's chief financial officer said, "Really most of what's left is just organic growth, which means you have to grow your traffic and you have to grow your monetization."

Google Chief Financial Officer George Reyes told investors at a Merrill Lynch conference Tuesday morning that "clearly our growth rates are slowing. And you see that each and every quarter. And we're going to have to find other ways to monetize the business." Google's share price was off more than 13 percent at one point Tuesday, before recovering somewhat in afternoon trading.

In a statement Tuesday afternoon, Google clarified Reyes' comments: "As we have stated before, monetization improvements will continue to be a key factor in driving future revenue growth. We still see significant opportunities to improve monetization and intend to continue to focus our efforts in this area. Moreover, as we have stated in our SEC filings, our revenue growth rate has generally declined over time and we expect that it will continue to do so as a result of the difficulty of maintaining growth rates on a percentage basis as our revenues increase to higher levels."

To which we respond: Is this news? Here are some recent stories by CNET News.com and other sources that provide some context for Reyes' comments. As you'll see, the CFO's comments shouldn't have been a surprise--although the stock market's reaction is never predictable.

• First earnings miss Google's stock has dropped more than 10 percent since the company missed fourth-quarter earnings expectations last month--its first earnings stumble since going public in August 2004. The company would have beat analysts' estimates if not for a higher-than-expected tax rate, Reyes said. The stock had increased more than 400 percent since going public, to an intraday high topping $475 in mid-January.

• Dependence on online ads From AdWords on search results to ads Google sells that are displayed on other publishers' Web sites and ads that appear alongside its free Gmail service, nearly all of Google's revenue comes from advertising. And Yahoo and Microsoft are nipping at its heels. To see a chart of Google's products and services click here.

• Criticism over China Google is looking to the vast and largely untapped Chinese market for growth, but even that business could be threatened. The company, along with Yahoo and MSN, has been blasted by members of Congress over cooperation with China's censorship policies. A bill has been drafted that would restrict such activities.

• Fighting U.S. subpoena Google's stock took another hit in January as investors worried that the company will be mired in a costly legal battle with the U.S. government over privacy of customer data. Google is challenging a Justice Department request to hand over nonpersonal search information. The case is pending.

• Copyright setback Google's sweeping search practices were dealt a legal blow when a federal judge ruled last week that portions of the company's image search site, which displays thumbnail versions of photos found on other sites, likely violate U.S. copyright law.

• Trademark, click-fraud lawsuits Google's core keyword-search ad business has been targeted by lawsuits over alleged trademark infringement and click fraud. CNG Financial has sued Google alleging that the company lets competitors buy keywords using CNG's trademark. Google is also named as a defendant in several class action lawsuits over advertisers being charged for clicks on online ads that are supposedly theirs but that they say are fraudulent.

• Book-scanning controversy Google has also been sued over its Book Search Library scanning project, which some publishers' and authors' groups argue violates copyright law.

• Ads in print, over the air Google is looking for ways to extend its lucrative advertising business model beyond the digital realm. The company has been experimenting with selling ads for print publications, with mixed results (articles on the topic can be found by clicking here, here and here). Google also is teaming with EarthLink on a wireless Internet proposal for the city of San Francisco, which likely will involve ads. Google also recently acquired DMarc Broadcasting, a company that sells ads that run on radio, and it plans to integrate the technology into its AdWords platform, creating a new radio ad distribution channel for Google advertisers.

• Hiring pace Google has been expanding at a phenomenally rapid rate, with Reyes saying in the conference call that 50 to 60 people are hired each week, raising questions of whether the company can retain its innovative, engineering-first culture and adequately manage its growth. Stories about Google's frenzied expansion can be read here and here.

• Blodget gets bearish Piper Jaffray recently bumped its 2006 price target for Google up to $600. However, former securities analyst Henry Blodget has speculated that slowing growth in online advertising could cut Google's stock to $100 a share. "Both market saturation and price pressure will occur naturally someday, as they do with every business. The only question is when," he wrote on his Internet Outsider blog.

Later Tuesday afternoon, Google's P.R. department released the following statement to "clarify" Reyes' comments: "As we have stated before, monetization improvements will continue to be a key factor in driving future revenue growth. We still see significant opportunities to improve monetization and intend to continue to focus our efforts in this area. Moreover, as we have stated in our SEC filings, our revenue growth rate has generally declined over time and we expect that it will continue to do so as a result of the difficulty of maintaining growth rates on a percentage basis as our revenues increase to higher levels."

Though Google executives strictly adhere to a policy of not providing public financial guidance, Wall Street is undoubtedly anxious to get more answers at the company's annual analyst day on Thursday.