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Google's Earnings Below Consensus; Google Unfazed
What happens when the Internet's cash cow stops giving milk? If investors weren't already spooked about this country's macroeconomic woes creeping into the tech economy, they might be now.

The after-hours sell-off has begun, as Google released fourth-quarter earnings that fell below analysts' expectations despite exhibiting substantial growth and a hopeful outlook for the future.

"We're optimistic about 2008," Google Chairman and CEO Eric Schmidt told analysts on a conference call following the earnings release. "We have growing revenue streams across a broad range of verticals and markets."

Google reported fourth quarter net income of $1.21 billion, or $3.79 per diluted share, up from $1.03 billion, or $3.29 per diluted share, in the same quarter last year. Excluding special items, earnings per share amounted to $4.43, falling below analysts' estimates of $4.47 per share.

Total Q4 revenues were $4.83 billion, a 51 percent increase over the same period the previous year, and up 14 percent from the third quarter of 2007.

Shares rose $16.03 (2.92 percent) to close at $564.30, but fell more than 7 percent in after-hours trading as investors looked askance at the disappointing earnings and the slowing growth in paid ad clicks.

Predictably, the key revenue drivers were Google's core operations of search and advertising, with a growing contribution from the Web-based software applications Google knows simply as "apps."

These were the three areas that Chief Financial Officer George Reyes identified as Google's main businesses, for both last quarter and the future, but it was in one of these areas that Google had to report one of its most disappointing metrics.

The number of aggregate paid clicks, which includes clicks on ads on Google's sites and the sites of its AdSense affiliates, increased nine percent over the third quarter, disappointing many analysts.

The executives on the call offered two explanations. The third quarter was aberrantly successful on that front, they said, suggesting that a sequential comparison makes Google a victim of its own success.

The second answer to the mild disappointment of the AdSense clickthroughs could well become an opportunity.

"Social networking inventory is not monetizing as well as we had expected," Reyes said.

Sergey Brin, one of Google's founders and its current president of technology, echoed Reyes' admission.

"We have had a challenge in Q4 with social networking challenges as a whole," he said, repeating the operative word. "It didn't pan out as well as we had hoped."

The executives would not answer specific questions about Google's $900 million ad deal with MySpace, noting that the AdSense program serves advertisements to many social networks, and that Google, just like everyone else, is still tinkering with the monetization strategy for the social sites.

In a momentary digression from the murky financials of the social Web, Brin touted the November launch of the OpenSocial common developer standard, which he said has been adopted by at least 20 social networks.

Schmidt was also buoyantly optimistic about Google's international expansion and the emerging opportunities of the mobile market.

"More than half of our search traffic is outside the United States," Schmidt said, but that's just the beginning. "The international market is still nascent."

A significant portion of Google's new employees are being hired abroad, as it continues to open in new markets and expand operations in existing ones. YouTube is available in 17 languages, Brin noted.

On the mobile front, Schmidt's enthusiasm was unbridled. Though he wouldn't offer any short-term growth projections, he said that down the road – 10 or 20 years from now – people would conduct more searches on mobile devices than on PCs. He heralded Apple's iPhone as the "first of its generation," referring to mobile devices that offer a Web experience of comparable quality to a computer.

"We hope that this is going to make mobile [Internet] as frictionless as it is on your desktop," Brin echoed, taking the opportunity to "give a shout-out to Android." Brin also touted the transformative potential of the Open Handset Alliance, which Google launched last year to encourage interoperability of applications on mobile devices.

The executives declined to answer any questions about the ongoing wireless spectrum auction.

In response to a question regarding the pending acquisition of DoubleClick, currently under review by the European Commission, Reyes simply said that Google was working with regulators to address their concerns. "We're certainly hopeful that it will get cleared," he said.

In response to the question that is inevitably asked at least once on every earnings call this season – the one about the imminent, sustained economic downturn – Senior Vice President Jonathan Rosenberg was pointed, explaining that he did "not necessarily agree with the thesis" of the question.

"We have not seen any negative impact from the rumors of recession," he said.
http://www.internetnews.com/bus-news/article.php/3725296