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Beware Deteriorating Cash Flow in Netflix, Amazon, Google Earnings

Google's Tax Shelter From the Storm

At Google, falling cash flow from operations may mask some growth concerns for the Web search giant and expose a poor-quality earnings beat that helped to push the company's shares beyond $800.

Google was able to beat earnings on April 18 because of an unexpected 50%-plus drop in its tax rate, which helped to bolster earnings by $1.22 a share, according to calculations by Sterne Agee analyst Shaw Wu.

Without the tax benefit, Google would have missed earnings by 33 cents, according to Wu's analysis.

On an earnings call, Google Chief Financial Officer Patrick Pichette explained to mystified analysts that the firm's sharp drop in quarterly income tax was a result of recognizing federal research and development tax credits negotiated in Congress' so-called fiscal cliff deal.

In the first quarter, Google reported income tax expense of just $287 million on $3.35 billion in net income, reflecting an 8% rate. The Mountain View, Calif- based company reported earnings of $11.58 a share, beating consensus expectations of $10.66, according to Thomson Reuters.

While Google's tax rate helped to drive about 80% of Google's earnings-per-share growth from the first quarter of 2012, the company's cash flow fell slightly to about $3.5 billion.

Analysts generally dismissed issues on Google's tax rate as "noise" and took the earnings report as a beat.

To be seen, however, is whether falling cash flow provides an early glimpse of slowing profits at the Web search titan.
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