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Economy eats away at Google profits

Google Inc.'s revenue growth decelerated more than analysts anticipated, magnifying worries that the Internet leader's moneymaking machine is bogging down.
/ Source: The Associated Press

Google Inc.'s earnings and revenue growth decelerated more than analysts anticipated during the fourth quarter, magnifying worries that the Internet search leader's moneymaking machine is bogging down as the U.S. economy teeters on the brink of recession.

The quarterly results released Thursday spooked already jittery investors, causing Google's slumping stock price to plunge another 7 percent.

Google earned $1.21 billion, or $3.79 per share, during the final three months of 2007. That's up 17 percent from net income of $1.03 billion, or $3.29 per share, in the same period a year earlier.

It's the first time Google's profit Google's quarterly profit has climbed by less than 25 percent since the Mountain View-based company went public nearly 3 1/2 years ago.

If not for stock awards given to its employees, Google said it would have made $4.43 per share — a penny below the average estimate among analysts polled by Thomson Financial.

Chief Executive Eric Schmidt rebuffed the notion that the feeble U.S. economy undercut Google's growth.

"I am happy to say we have not seen a negative impact from the rumors of a future recession," Schmidt told analysts during a Thursday conference call.

Company co-founder Sergey Brin said in an interview that the company hasn't seen evidence of the recent economic turmoil affecting its business.

"I'm very happy with things," Brin said. "I think things are going really well."

Google executives said a revision in the company's formula for showing advertising links crimped the fourth-quarter results by reducing the number of revenue-generating clicks. Without providing details, the executives said Google made the change to decrease the frequency of "accidental" clicks on ads.

Total paid clicks rose 9 percent between the third and fourth quarters, less than analysts expected.

Brin and other executives also said Google didn't reap as much revenue as management envisioned from its advertising partnerships with rapidly growing online social networks like News Corp.'s MySpace.

Management didn't quantify the size of the shortfall, but Brin said engineers are addressing the problem.

Revenue totaled $4.83 billion, a 51 percent improvement over $3.21 billion in the previous year.

In a more important measure to investors, Google retained $3.39 billion in revenue after paying fees to the thousands of Web sites in the online advertising network that fuels its profits.

The net revenue missed analyst estimates by about $60 million, or just under 2 percent.

Google's fourth-quarter performance would make most companies envious.

But Google's market value of $175 billion has been built on the premise that it will consistently produce even more robust profit gains as advertisers shift their spending to the Internet from television, radio, newspapers and magazines.

The fourth-quarter letdown may reinforce a belief that Google won't rake in as much online advertising revenue as consumers clamp down on their spending amid signs of recession.

Google generally only gets paid when Web surfers click on an advertising link on its site and other online destinations. So its growth could taper off if consumers become less inclined to click on ads because they're more reluctant to spend.

Those economic concerns contributed to a nearly 20 percent decline in Google's stock price this month. Now it looks like the sell-off will continue as the calendar turns to February.

Google shares rose $16.03 to finish at $564.30 in Thursday's regular session then plunged $38.45 in extended trading after the fourth-quarter results came out.

Google could benefit if consumers become more focused on saving money during hard times, according to Jonathan Rosenberg, the company's senior vice president of product management and marketing.

In Thursday's conference call, Rosenberg painted a scenario in which more consumers will turn to the Internet in search of the best deals — a search that will lead them to Google and perhaps induce more revenue-producing clicks on ads.

The global appeal of Google's search engine also may help insulate the company from economic misery in the U.S. The company's international sales in the fourth quarter totaled $2.32 billion, or 48 percent of its revenue.

Besides the dark clouds hanging over the U.S. economy, other issues have weighed down Google's stock.

Investors are particularly concerned about Google's participation in a U.S government auction of a prized piece of the airwaves that will cost the winning bidder at least $4.6 billion. The bidding isn't expected to be completed until March.

Although Google could use the 700 megahertz spectrum to profit from advertising delivered to mobile phones, many investors are worried the expansion could become a financial drain and distract management from the company's main Internet business.

Schmidt sidestepped questions about the airwaves auction because of government rules that prohibit participants from talking during the bidding.

Google ended the year with $14.2 billion. Following through on a pledge made after its last earnings disappointment in July, Google pulled back on hiring. The company added 889 workers during 2007's final three months after bringing in more than 2,100 employees during the June-September period.

For all of 2007, Google earned $4.2 billion, or $13.29 per share, a 37 percent improvement over $3.1 billion, or $9.94 per share, in 2006. Revenue in 2007 totaled $16.6 billion, a 56 percent increase from $10.6 billion in 2006.