Economy eats away at Google profits

updated 7:21 p.m. ET Jan. 31, 2008

MOUNTAIN VIEW, Calif. - 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.

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