Google's profit surged 82% and sales surged in the fourth quarter as the Internet search giant continued to gain from advertisers shifting their spending online from traditional media.
The leading search engine company posted net income of $372.2 million, or $1.22 a share, compared with $204.1 million, or 71 cents a share, in the same quarter last year.
Revenue was $1.92 billion, up from $1.03 billion in the year-earlier period. Excluding commissions Google pays to AdSense advertising partners, known as traffic acquisition costs, revenue was $1.29 billion, up from $652 million a year earlier.
Google continues to lead online search with the company's share of searches grew from 45.7% to 46.3% from June to November 2005, according to Nielsen/NetRatings.
The company's stock has also soaring since its initial public offering in August 2004, with shares more than doubling in the last year to more than $400.
Shares plunge
However, in after-hours trading, Google shares fell to $370, a loss of 15 percent, in volatile trading. Before the after-hours fall, Google shares were up more than 120% from 12 months earlier.
Google's tax rate was higher than forecast by Wall Street. At the tax rate initially forecast by Google, adjusted earnings would have been $1.81 per share, versus the consensus of $1.77.
"Compared to the [financial] models that people have out for Google, the big difference was a different tax computation -- but the revenue and profit growth were all very strong and at or above the models," said Chief Executive Eric Schmidt in an interview. The company said its effective tax rate during the fourth quarter was 41.8%, bringing its 2005 effective tax rate to 31.6%. In October, it had said it expected its effective tax rate to be around 30% for the year.
The higher tax rate arose, Google said, because the company allocated more expenses than expected to its international operations, resulting in it paying taxes on a greater percentage of profits in the U.S., where tax rates are generally higher. "These estimates are complex," said Chief Financial Officer Georges Reyes, forecasting a 30% effective tax rate for 2006. Google didn't provide other detailed financial forecasts.
Analysts said that high investor expectations were likely to be a factor in the stock-market fall. Google reported 23% revenue growth from the third quarter, when certain marketing expenses are factored out. However, that wasn't enough for some investors.
Comment by Eric Schmidt:
"We are very pleased with our results for the fourth quarter as we achieved excellent performance across our businesses," said Eric Schmidt, CEO of Google. "We generated significant revenue growth in our core search and advertising business, driven by continued strength in traffic and monetization. We will continue to invest significantly as we develop innovative new products and as we extend our core technologies to new user access points and to different channels."
Q4 Financial Summary
Google reported revenues of $1.919 billion for the quarter ended December 31, 2005, an increase of 86% compared to the fourth quarter of 2004 and an increase of 22% compared to the third quarter of 2005. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs, or TAC. In the fourth quarter, TAC totaled $629 million, or 33% percent of advertising revenues.
Google reports operating income, net income and earnings per share (EPS) on a GAAP and non-GAAP basis. The non-GAAP measures are described below and reconciled to the corresponding GAAP measure in the section below titled "About non-GAAP financial measures."
* GAAP operating income for the fourth quarter was $570 million, or 29.7% of revenues. This compares to GAAP operating income of $529 million, or 33.5% of revenues, in the third quarter. Non-GAAP operating income in the fourth quarter was $718 million, or 37.4% of revenues. This compares to non-GAAP operating income of $596 million, or 37.8% of revenues, in the third quarter.
* GAAP net income for the fourth quarter was $372 million as compared to $381 million in the third quarter. Non-GAAP net income was $469 million, compared to $437 million in the third quarter.
* GAAP EPS for the fourth quarter was $1.22 on 304 million diluted shares outstanding, compared to $1.32 for the third quarter, on 290 million diluted shares outstanding. Non-GAAP EPS was $1.54, compared to $1.51 in the third quarter.
* Our effective tax rate for the fourth quarter increased to 41.8% this quarter, and to 31.6% for the year, above our previously announced expectation of approximately 30% for the year. Primarily because the proportion of total expenses allocated to our international operations was greater than we anticipated, more of our profits were taxed at a higher domestic tax rate; this resulted in a greater effective tax rate compared to our expectations. We expect our effective tax rate for 2006 to be approximately 30%.
* Non-GAAP operating income, non-GAAP net income, and non-GAAP EPS are computed net of certain material items: stock-based compensation (SBC), in-process research and development (IPR&D) charges, and also Google's contribution to the Google Foundation of $90 million, which the company made in the fourth quarter of 2005. In the fourth quarter, the charge related to stock-based compensation was $58 million as compared to $46 million in the third quarter. IPR&D charges were immaterial in the fourth quarter of 2005, compared to $21 million in the third quarter. Tax benefits related to stock-based compensation charges and the contribution to the Google Foundation have been excluded from non-GAAP net income and non-GAAP EPS. The tax benefit related to SBC was $14 million in the fourth quarter and $11 million in the third quarter, and the tax benefit related to the contribution to the Google Foundation in the fourth quarter was $37 million. Google does not expect to make further donations to the Google Foundation for the foreseeable future. Reconciliations of non-GAAP measures to GAAP operating income, net income, and EPS are included at the end of this release.
Q4 Financial Highlights
Revenues - Google reported revenues of $1.919 billion for the quarter ended December 31, 2005, representing an 86% increase over fourth quarter 2004 revenues of $1.032 billion, and a 22% increase over third quarter 2005 revenues of $1.578 billion. Growth over the third quarter was driven by expected seasonal strength in both traffic and monetization. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs, or TAC.
