February 01, 2006

How Low Will Google Go?
Posted by Gordon Smith

Google was down over $50 in after-hours trading. Net income was up over last year, but not as much as analysts had expected. The excuse? Taxes:

Google squarely blamed its tax rate. "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 applied, Google said, because the company allocated more expenses than expected to its international operations, resulting in its 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. Keeping with its practice, Google didn't provide other detailed financial forecasts.

Google is still optimistic about its future, of course, citing international markets and brokering radio commercials as growth areas. In the end, however, it's still just advertising all the way down.

UPDATE: Business Week tentatively suggests that "a new era of Google scrutiny may be dawning."

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