UPDATE 3-Google profit falls short of Wall Street view

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By Eric Auchard

SAN FRANCISCO Jan 31 (Reuters) - Google Inc (GOOG.O) on Thursday reported a disappointing quarterly profit and aggressive spending plans to support a widening range of Web services, unnerving investors who sent its shares down 8 percent.

The world's top Internet company said it expected to continue to make "significant capital expenditures" after spending $678 million in the fourth quarter on data centers, computers and networks -- well above analysts' forecasts.

But Google executives said they were seeing no signs of deterioration of the U.S. economy in their own business and expect advertisers will maintain spending with Google even if they start to slash budgets.

"We have not seen any impact yet from the rumors of future recessions," Google Chief Executive Eric Schmidt told investors on a conference call, confronting fears that have clobbered Google shares and global stock markets in the past month.

Fourth-quarter revenue was slightly shy of Wall Street targets, however, and the rising level of payments to affiliated sites that show Google ads, called traffic acquisition costs, also surprised some.

"The traffic acquisition costs came in much higher than expected and suggests that some of the big deals with their partners may have been renegotiated with higher terms for the partners," said Jordan Rohan, an analyst at RBC Capital.

The results were disappointing given the Web search leader's track record of beating expectations, he added.

Fourth-quarter net income rose to $1.21 billion, or $3.79 per diluted share, from $1.03 billion, or $3.29 per diluted share, in the year-earlier quarter.

Excluding special items, earnings per share amounted to $4.43, falling short of analysts' average forecast of $4.47, according to Reuters Estimates.

Revenue rose 51 percent to $4.827 billion. Analysts, on average, had predicted revenue of $4.83 billion, with estimates ranging from $4.67 billion to $5.10 billion.

"There was a slight softness in revenue which perhaps portends softness going forward due to the ... U.S. economy," said Clayton Moran of Stanford Group.

UK GROWTH SLOWS

Advertising sales in Britain, Google's second-largest market after the United States, grew just 5 percent, or less than half the rate of the final quarter of 2006, amid weak holiday spending by financial services and travel advertisers.

Capital spending grew 20 percent in the fourth quarter over the third quarter of 2007 and was up 85 percent from the final quarter of 2006. Citigroup had warned that spending above $600 million during the quarter would be a negative sign.

Google, which derived virtually all its $16.6 billion in 2007 revenue by selling pay-per-click online advertising, said growth in the percentage of paid clicks slowed to 30 percent -- only half as fast as the 61 percent growth rate for the closely watched metric in fourth quarter of the previous year.

Co-founder Sergey Brin said the company has been seeking to pare back low-quality advertisements, which had affected ad click rates. "I am not worried by that at all. It is not a way we measure things internally," Brin said in an interview.

Google shares traded at $524.87 in extended trading, down from their Nasdaq close of $564.30.

The stock has fallen 24 percent in the month of January. A stock market darling among technology issues during 2007, the stock has fallen from levels near $750 in November, when many analysts raced to boost Google price targets as high as $900.

"It's been in the momentum-buying category for some time now and market conditions are harsh for momentum stocks when they miss," said Keith Wirtz, chief investment officer at Fifth Third Asset Management, which manages $22.5 billion.

"So we expect the stock has further to go in terms of a price readjustment," he said, adding that it could take months for selling pressures to ease. His fund will hold its positions in the shares but not buy more until the pressures dissipate.

On a price to earnings measure, the volatile stock has traded between 29 and 59 in the past two years, with a 39 P/E on average, Citigroup estimates. It now trades at 29 times the average 2008 profit estimate, according to Reuters Estimates.

Google slowed the pace of hiring dramatically in the fourth quarter, increasing the number of full-time employees to 16,805, up just 5.5 percent from the end of the third quarter. The company's hiring growth rate has grown in double digits each quarter for several years and has been controversial with analysts who say Google needs to keep a tighter rein on costs. (Additional reporting by Michele Gershberg and Jennifer Ablan in New York and Gina Keating and Susan Zeidler in Los Angeles; Editing by Braden Reddall)