Google's Problems not all tax-related

Taxes were a problem for Google's fourth-quarter earnings, but not as much as investors may have been led to believe. Google's fourth-quarter net income of $1.54 a share, excluding items, missed expectations by 22 cents. (In response, Google shares dropped 12% in after-hours trading Tuesday, 7% Wednesday and 1.4% yesterday.) Google executives stressed that most of the earnings shortfall was attributable to the company having a higher U.S. tax bill than anticipated.

But a closer look at Google's results show that only half of the earnings shortfall - 11 cents a share - may be related to taxes. Google had to record more taxes than expected in the fourth quarter because more of its expenses were allocated to its international operations than it had expected, compared with its U.S. operations. That, in turn, raised U.S. pretax profit as a proportion of Google's total, and a greater percentage of Google's profit was taxed at a higher domestic tax rate. The company's effective tax rate for the fourth quarter was 41.8%; the rate for the full year was 31.6%, compared with Google's projection of about 30%.

Google recorded about $2.14 billion in pretax profit for the year. Applying Google's prior estimate of a 30% effective tax rate to that gets a tax bill of $642.6 million. Google had an actual tax of $676.3 million, the upshot being that the company paid $33.7 million more in taxes than it expected, a figure all attributable to the fourth quarter. However, this equates to only 11 cents a share, using Google's diluted share count of about 304 million. Scott Devitt, an analyst with Stifel Nicolaus, uses different numbers to arrive at a similar conclusion and says the company is off base in blaming most or all of its shortfall on the tax issue. The analyst, who has a "sell" rating on Google shares, stresses that whatever the particular reason for the shortfall, the stock is vulnerable to the market's ever-rising expectations.

Source: Wall Street Journal