Google Inc. : UPDATE : Google Profits Disappoint As Capex Rises, International Revenue Slows
01/19/2012| 05:40pm US/Eastern
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By John Letzing
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Google Inc.'s (GOOG) fourth-quarter earnings rose a disappointing 6.3% as the Internet giant continued to invest heavily in the company and saw a slowdown in overseas revenue growth.
Shares of the Mountain View, Calif., company fell 9% in after-hours trading to $582.22. The stock hasn't closed below $600 in the regular session since November.
The Mountain View, Calif., has invested heavily in its business by dramatically adding to its headcount and increasing its spending on data centers, servers and networking equipment. The result lifted Google's operating expenses to 32% of revenue from 30% a year ago.
"As a reminder, I will continue to make significant capex investments, and these have shown to be lumpy from quarter to quarter, depending on when we're able to make these investments," said Patrick Pichette, Google's chief financial officer.
The higher costs surprised the Street, though, as Google's earnings missed analyst estimates by nearly a dollar per share. Overall, Google posted a fourth-quarter profit of $2.71 billion, or $8.22 a share, up from $2.54 billion, or $7.81 a share, a year earlier. Excluding stock-compensation costs, per-share profit rose to $9.50 from $8.75. Analysts surveyed by Thomson Reuters expected earnings of $10.49 a share.
"This is classic Google, they're not going to take their foot off the accelerator in terms of capex," said David Rolfe, chief investment officer at Wedgewood Partners, which manages $1.1 billion in assets and is a holder of Google stock.
In the quarter, Google added 1,114 full-time employees, bringing its total to 32,467 as of Dec. 31. For the year, Google added more than 8,000 new employees; the company had said it expected 2011 to top its previous record for new hires, which was 6,000 in 2007.
Google's revenue also fell short of expectations. Overall, revenue increased 25% to $10.58 billion. Excluding traffic-acquisition costs--which are the commissions paid to marketing partners--revenue rose 28% to $8.13 billion, below the average analyst estimate on Thomson Reuters of $8.41 billion.
Foreign exchange rates lowered Google's revenue, as did a slowdown in some markets. "People were assuming that the strength we were picking up in the U.S. would apply equally around the globe, and it proved not true in international markets outside of the U.K.," said Jordan Rohan, analyst at Stifel Nicolaus.
In addition, Google's average cost-per-click--which represents the prices paid for clicks by advertisers--fell 8% in the fourth quarter. Google blamed the decrease on more clicks on lower-priced ads.
U.S. paid clicks, a measure of how frequently consumers click on Google's advertisements, increased 34% compared with a year earlier and 17% sequentially.
"Long story short, if the stock hadn't traded up so incredibly over the last three months," Rohan said, noting Google's 10% rise over the past three months, "investors would have been in a better position. But they were likely caught leaning the wrong way on this."
-By John Letzing, Dow Jones Newswires; 415-765-8230; john.letzing@dowjones.com
--Joan E. Solsman contributed to this report.
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