High Bar Hits Google - TheStreet

High Bar Hits Google

Earnings are strong, but shares slip as revenue disappoints.
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Updated from Jan. 31

That's the trouble with high expectations.

After blowing by Wall Street's earnings forecasts and clearing revenue predictions as well, shares of

Google

(GOOG) - Get Report

slipped Thursday in the wake of the company's fourth-quarter report.

The stock was recently off 0.9%, or $4.34, to $497.16.

On Wednesday, Google reported $3.18 a share in adjusted earnings, far ahead of the $2.92 analysts surveyed by Thomson Financial forecast. Net revenue of $2.23 billion also exceeded the consensus estimate of $2.19 billion.

And revenue would have been even higher were it not for Google's aggressive promotion during the quarter of Checkout, its online payment service that has huge potential down the road, even as it makes Google's ad platform more attractive to merchants in the meantime.

While Google wasn't specific about amounts, the company listed its backing of Checkout as contra-revenue, meaning that it was deducted from the overall revenue figure and may give a muted impression of the company's bottom-line growth.

It's the kind of performance that most investors in a company would happily take. Except that for investors looking at Google, the quarter looks remarkably similar to the third quarter which preceded it. Then, Google exceed the consensus EPS numbers by 8%, as compared with the slightly higher 8.9% this time around. The company cleared revenue estimates by about 3.3% then, a bit more than the 1.8% this time around, but a figure that would be even closer were it not for the Checkout promotion.

For a company with Google's shine, winning games by the same number of points just doesn't seem to impress.

But there were several signs that Google continues to fine-tune its staple targeted search business -- where it seems to extend its lead in market share over rivals each day -- while at the same time staying poised to launch into new money-making arenas.

The precision with which Google targets ads continued to rise over the quarter, Google CEO Eric Scmidt said on a conference call for investors. This allows the company to keep profits streaming in, even as it reduces the number of ads it places on a page and removing ads from less commercially-oriented searches.

Google also continues to advance its method of assessing the usefulness of the Web page an ad sends users to, thereby making sure that not only ads -- but what also what follows them -- is more relevant to users.

By making Web searchers continuously easier and more intuitive for users, Google is in the position to further cement its lead in that expanding market. "Our ad systems continue not just to make money, but to focus on ad quality," Google's co-founder and president of technology Sergey Brin said. "We continue to enhance ad matching and eliminating ads from less commercial queries."

The company also is looking for ways to muscle into the graphical advertising business, another arena rife for growth given the popularity of the Web sites it operates. Google also had a bullish outlook for its expansion into the mobile sector, though the company said that an aggressive adoption in the year ahead would likely precede revenue rolling in during 2008.

Google reported that the adoption of Checkout is going better than the company expected. Symbols in Google's search results that a merchant is covered in Checkout not only drive more users to its site but have been shown to increase sales, Brin said. Merchants are "beginning to think about Google as a sales channel versus a marketing expense," Brin said.

On Wednesday, the Mountain View, Calif., Internet search giant announced that it made $1.03 billion, or $3.29 a share, for the quarter ended Dec. 31. That's up from the year-ago $372 million, or $1.22 a share. Excluding certain items, latest-quarter adjusted earnings were $3.18 a share.

Net revenue was $2.23 billion.

Traffic acquisition costs, the portion of revenues shared with Google's partners, were steady at 31% of gross revenue in both the fourth quarter and the third quarter.

Google-owned sites generated 62% of total revenue and posted a gross revenue increase of 80% from a year ago. Google's partner sites generated 37% of total revenue and showed 50% growth from a year ago.

International revenue contributed 44% of total revenue in the fourth quarter. Had foreign exchange rates remained constant in the second half, revenues in the fourth quarter would have been $18 million lower. Had foreign exchange rates remained constant from the fourth quarter of 2005 through the fourth quarter, revenue would have been $81 million lower.

Aggregate paid clicks, which include clicks related to ads served on Google sites and AdSense partners, rose 61% from a year ago and 22% sequentially.