Google year-end results disappoint

SAN FRANCISCO (Reuters) - Google Inc (GOOG.O) on Thursday reported disappointing quarterly results on rising capital spending and costs for acquiring advertising customers, unnerving investors who sent its shares down 6.5 percent.

Revenue rose 51 percent to $4.827 billion, just shy of the $4.83 billion, on average, analysts had forecast. A rising level of payments to affiliated sites that deliver Google ads, called traffic acquisition costs, also surprised some.

"This quarter was softer-than-expected across the board," Cantor Fitzgerald analyst Derek Brown said. "Revenue from Google Web sites was a little bit lower and traffic acquisition costs were slightly higher than we had expected."

The disappointment was especially pronounced given the Web search leader's record of beating expectations, analysts said. It was only the third time in 14 quarters as a public company that Google failed to top Wall Street profit forecasts.

But Google executives underscored their belief that there were no signs that a weakening U.S. economy so far was hurting its own results and that they expect advertisers to maintain spending with Google even if they slash overall ad budgets.

"We have not yet seen any negative impact from the rumors of future recessions," Chief Executive Eric Schmidt told investors on a conference call, challenging investor psychology that has clobbered global stock markets in the past month.

Rival Yahoo Inc (YHOO.O) said on Tuesday that key online ad categories remained strong, but it had felt weakness in travel, financial and retail. Yahoo depends on display ads preferred by brand marketers, while Google's focus is on Web search ads.

Google's fourth-quarter net income rose to $1.21 billion, or $3.79 per diluted share, from $1.03 billion, or $3.29 per diluted share, in the year-earlier quarter. Excluding special items, earnings per share were $4.43, short of analysts' average forecast of $4.47, according to Reuters Estimates.

Wall Street analysts said Google's weaker-than-expected results had any number of contributing factors.

"They missed on revenue -- not by much -- but for the first time in a while," Sanford C. Bernstein analyst Jeffrey Lindsay said. "I don't think economic weakness has arrived yet," he said, adding, "They face competitive issues."

"Google is not taking share away from the other guys as easily as it was," Lindsay said. "The company is at the point where the raw gains in growth don't mask the trends in the marketplace so much anymore."

SOCIAL NETWORK WEAKNESS

Executives acknowledged Google has struggled to make inroads selling ads on social network sites -- now the Web's hottest market -- such as News Corp's (NWSa.N) MySpace.

Lindsay speculated Google is having trouble making money on its $900 million, three-year deal to sell advertising to MySpace customers.

Rising traffic acquisition costs may reflect the fact that Google pays MySpace whether or not it makes money selling ads on MySpace. "It's a toxic deal for Google," Lindsay said. "That is eating into margins."

Ad sales in Britain, Google's second-largest market after the United States, grew just 5 percent, or less than half the rate of the final quarter of 2006, amid weak holiday spending by financial services and travel advertisers.

Capital spending grew 20 percent in the fourth quarter over the third quarter of 2007 and was up 85 percent from the final quarter of 2006. Citigroup had warned that spending above $600 million during the quarter would be a negative sign.

Google shares traded at $527.40 in extended trading, down from their Nasdaq close of $564.30. Immediately following the results, the stock fell to around $510, down 9.5 percent.

The stock fell 24 percent in January. A 2007 darling among technology stocks, it has fallen from near $750 in November, when analysts raced to boost price targets as high as $900.

"It's been in the momentum-buying category for some time now and market conditions are harsh for momentum stocks when they miss," said Keith Wirtz, chief investment officer at Fifth Third Asset Management, which manages $22.5 billion.

"So we expect the stock has further to go in terms of a price readjustment," he said, adding that it could take months for selling pressures to ease. His fund will hold its positions in the shares but not buy more until the pressures dissipate.

On a price to earnings measure, the volatile stock has bounced between 29 and 59 in the past two years, with a 39 P/E on average, Citigroup estimates. It now trades at 29 times the average 2008 estimate, which Global Crown Capital analyst Martin Pyykkonen marks as "growth at a reasonable price."

Google slowed the pace of hiring dramatically in the fourth quarter. Its 16,805 full-time employees was up just 5.5 percent from the end of the third quarter. The quarterly hiring growth rate had been in double digits for years, leading analysts to call for Google to keep a tighter rein on costs.