Updated from 4:35 p.m.
missed Wall Street's fourth-quarter profit view by a wide margin Tuesday, sending its shares tumbling 15% in after-hours action.
The Mountain View, Calif., company made $372 million, or $1.22 a share, up from the year-ago $204 million, or 71 cents a share.
More important, the search giant put its non-GAAP earnings for the quarter ended Dec. 31 at $1.54 a share. Analysts surveyed by Thomson First Call were looking for $1.76. Net revenue, excluding the money Google shares with advertising partners, was in line with estimates at $1.29 billion.
One surprise came on the tax line, where Google had guided for 30% but came in at 31.6% for the year and 41.8% for the latest quarter. The company cited a rise in costs internationally.
"Initially, the tax rate was a negative surprise," says Tim Ghriskey, chief investment officer of Solaris Capital Management, which owns Google shares. "Estimates were at 26%."
"Most of the miss was related to the tax impact,'' CFO George Reyes said on the company's postclose conference call with analysts. Google said it expects the tax rate to be back around 30% for 2006.
Another surprise came on the expense side, where Google saw both capital spending and overhead costs rise more than expectations.
"We are scaling this business rapidly and we are investing for the long term," said CEO Eric Schmidt on the call, saying there will be more focus on advertisers and more spending on search technology. "This remains a unique and historic opportunity."
Wall Street was stunned by the miss, sending the stock to levels not seen since Halloween. Investors had been hoping Google would roll out its usual blowout quarter and compensate for the poor showing of rival
two weeks ago. Instead, Google added to swirling concerns about the tech sector.
The stock dropped 16% immediately as trading resumed after a postclose halt, then bounced around between 13% and 17% down as the conference call got under way. Google, which last fetched $360 at the end of October, was at $366 at 5:10 p.m.
Speaking of the company's runaway stock gains and rich price-to-earnings multiple, Ghriskey adds, "This is a company that's priced for perfection and it didn't deliver perfection today."
Gross revenue rose 86% from a year ago and 22% sequentially to $1.92 billion. The company said fourth-quarter traffic acquisition costs, reflecting the amount paid out to ad partners, was $629 million, or 33% of advertising revenue.
Operating income fell to 29.7% of revenue from 33.5% in the third quarter on a generally accepted accounting principles basis. Non-GAAP operating income was 37.4% of revenue, against 37.8% in the third quarter.
Revenue from Google-owned sites rose 24% sequentially to $1.1 billion and represented 57% of total revenue. Revenue from Google's partner sites rose 18% from third-quarter levels to $799 million, or 42% of total revenue.
Revenue from outside the U.S. contributed 38% of total revenue, compared to 39% in the third quarter and 35% a year ago. International revenue reflected the unfavorable impact caused by the appreciation of the dollar and stronger seasonal trends in the U.S. relative to the international business. Had foreign exchange rates remained constant from the third quarter through the fourth quarter, revenue would have been $12 million, or 0.6%, higher. Had foreign exchange rates remained constant from 2004 through 2005, revenue would have been $40 million, or 2.1%, higher.
Schmidt also quashed speculation that the company is interested in getting into the hardware business, with the much-discussed if so far nonexistent Google Cube.
"We are very pleased with the performance of our business on every level," Schmidt insisted despite the steep selloff and the failure of analysts to preface their remarks on the call with the obligatory "great quarter, guys." Google also believes that many international markets are "underpenetrated,'' Schmidt says.
Google's fans remained upbeat.
"Will it come back?" asks Ghriskey of Solaris. "Of course it will. This is a great company on a high-growth trajectory.''