Google Q3 fails to impress

Profits treble thanks to cost-cutting, but revenue growth disappoints

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By  Rob Corder Published  February 1, 2007

Web search leader Google Inc. said on Wednesday quarterly profit nearly tripled, helped by a lower tax rate and expense controls, but revenue growth failed to impress investors.</p>   <p>Shares in Google fell as much as 3.5 percent in extended trading after the company reported results, though the declines were muted as executives said they would continue major investments in the business to bolster financial results.</p>   <p>"We're going to continue to invest significantly in capital expenses," Google Chief Executive Eric Schmidt told Reuters. "Our financial results in the last couple of quarters were directly related to that 'overinvestment'."</p>   <p>Google is deriving more revenue out of running fewer ads that are more targeted to specific audiences on the Web, Schmidt told investors on a conference call.</p>   <p>Growth will also be boosted by Google's growing business outside of its established U.S. and British markets, partnerships with affiliate networks, and its expansion into radio, video and mobile ad formats, he said.</p>   <p>Google's revenue grew 67 percent in the fourth quarter to $3.21 billion, compared with average analysts' estimate of a 64 percent year-on-year increase to $3.14 billion, according to Reuters Estimates.</p>   <p>Revenue growth is closely watched as investors gauge Google's ability to capitalize on Web advertising against rivals such as Yahoo Inc. and Microsoft Corp.</p>   <p>Some analysts had predicted Google would significantly beat expectations for the quarter, with data showing the company continued to gain share in search queries and on weaker growth at Yahoo, which is moving its clients to a new ad system.</p>   <p>"The stock is down because they didn't blow out the numbers. Expectations have come up recently," said Martin Pyykkonen, analyst at Global Crown Capital. "They gained share relative to Yahoo in paid search but not by a wide margin."</p>   <p>Google's net income grew to $1.03 billion, or $3.29 per share, from $372.2 million, or $1.22 per share a year ago.</p>   <p>Excluding stock-based compensation and amortization charges, as well as a tax credit, earnings came to $3.18 per share, beating the average analyst forecast of $2.91.</p>   <p>PAID CLICKS SURGE</p>   <p>Strong advertising for the holiday shopping season helped Google's revenue growth, as well as increased spending in Germany and France. The total revenue figure includes $976 million in traffic acquisition costs, the financial cut that affiliated Web sites receive for featuring Google ads.</p>   <p>Company executives said paid clicks, the basis for its advertising revenue, rose 61 percent from a year ago. Goldman Sachs analyst Anthony Noto said the data "reinforces our view that 50 percent revenue growth in 2007 is conservative."</p>   <p>"The stock reaction should be generally neutral given that results are generally in-line with investor expectations," Noto said in a research note to clients. He rates the share a "buy" with a $595 price target.</p>   <p>Google shares were trading at around $494.40, down from their Nasdaq close of $501.50.</p>   <p>Google's namesake sites contributed 62 percent of total revenue, while partner sites using its AdSense system contributed 37 percent.</p>   <p>On a geographic basis, international revenue amounted to 44 percent of the total, up from 38 percent a year ago. Google's total expenses grew 59 percent in the fourth quarter, compared with nearly 68 percent in the third quarter.</p>   <p>Google has posted steady market share gains for most of the past year in Web search, propelling its shares as high as $513 on hopes that will translate into even higher revenue. For 2007, the consensus revenue forecast, including TAC, is for 44 percent growth, according to Reuters Estimates.</p>   <p>Google is also pushing into a variety of new formats beyond its pay-per-click text ad business.</p>   <p>"Probably the biggest one (format) that is going to be coming is radio," Schmidt said.</p>   <p>Fresh from its $1.65 billion purchase of Web video-sharing site YouTube late last year, the company is also testing how it could insert targeted ads into television shows, Schmidt said.</p>   <p>The technology would involve piping ads into a viewer's set-top box, in coordination with TV service operators and programmers. Schmidt did not give further details (Additional reporting by Eric Auchard in London, Tiffany Wu in New York, Sue Zeidler and Lisa Baertlein in Los Angeles and Duncan Martell in San Francisco)</p>

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