Google Beats Estimates, Profits Take a Hit

Over $1 billion in charges from investments in AOL and Clearwire hurt the bottom line.

Google joined Apple and IBM as one of the few tech companies to report good news in its most recent earnings report. The search giant beat analysts' estimates today, though it reported a sharp drop in net income for the fourth quarter to $382 million, or $1.21 a share, well below the $1.2 billion, or $3.79 a share from a year ago.

Revenue for the fourth quarter rose 18 percent from the same period last year to $5.70 billion and three percent from the previous quarter. Google (NASDAQ: GOOG) also suffered significant non-cash-impairment charges of $1.09 billion related primarily to its investments and AOL and Clearwire, a wireless broadband service that has partnered with Intel (NASDAQ: INTC) to build WiMax services across the country.

"The results were better than I expected," IDC analyst Karsten Weide told "Google is doing great because about half of the online ad spend in the U.S. is search and they have about half that market. They are leveraging the biggest market out there."

On a conference call with financial analysts, Google CEO Eric Schmidt noted "strong search query growth year on year." He also credited "tight control over costs that may have eluded us in the past, but I think we've got the formula down now."

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Schmidt acknowledged AOL and Clearwire were "significant writedowns," but thinks there's a longer term payoff to come. "Both deals made sense for us and continue to fit with our business philosophy."

While neither Schmidt or other Google executives on the call got very specific about new initiatives or product plans, he did say the company is looking at new ways to recognize the contextual meaning of a search phrase, which it would be rolling into its market leading search engine.

The past year saw Google branch out significantly beyond its original model of text-only results. In 2008 Google tripled the number of non-text only results, which includes video, images, blogs and books, said Jonathan Rosenberg, Google's senior vice president or product management.

He also said Google's $125 million settlement in October with the Authors Guild and the Association of American Publishers promises to make content from millions of out-of-print books accessible online and even create a new market for the sale of those books.

Analyst Weide said Google still faces challenges growing the display side of its ad business. He said Yahoo (NASDAQ: YHOO) is the online display ad leader with about a 16 percent share in a very fragmented market. "Search advertising isn't always going to be the biggest segment. It probably will still be in five years, but not always and right now Google is essentially a one-trick pony," he said.

Weide also said YouTube's been "a sinkhole" for Google, which bought the video site for over $1.65 billion in 2006. "User generated content can work as an advertising source, but it's going to take a while," said Weide. "I think Google is going to have to acquire long form, professional content because big name advertisers want premium content not grainy, amateur video."

Rosenberg said Google continues to experiment with different ad approaches for YouTube. "It's hard to match the right format with the right content," he said. "We have to come up with a standard format to make it easier."

New employee stock options

Google also announced a new stock options plan, beginning January 29, that's designed to help retain employees. Schmidt said about 85 percent of its 20,000 employees had stock options "under water," or priced higher than the current trading price of stock.

Under the voluntary plan, employees can exchange all or a portion of their existing stock options for the same number of new options. Google said it expects the new options to have an exercise price equal to the closing price per share on March 2, 2009. Stock options with exercise prices above the March 2 closing price would be eligible for exchange, though Google said details of how the plan will work could change.

In after hours trading Thursday, Google shares were down $8.18 to $298.32.

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