Lower taxes loom large in Google earnings surprise

By Eric Auchard

SAN FRANCISCO (Reuters) - Google Inc.'s (GOOG.O: Quote, Profile, Research, Stock Buzz) latest quarterly profit beat expectations by a wide margin yet again, but a lower tax bill played a big role this time, calling into question how sustainable such surprises may be.

The immediate issue for holders of the leading Internet stock following the quarterly report was how much of the profit surprise, which investors have come to demand from such highly valued shares, was tied to an unexpectedly lower tax rate.

Google posted 69 percent first-quarter profit growth, far better than an average Wall Street analyst prediction of a 45 percent rise. The effective tax rate was 26 percent, not the 30 percent rate the company steered analysts to expect this year.

"Google did do a great job on execution, but the lowered tax rate helped Google generate an impressive earnings growth," Trip Chowdhry, an analyst with Global Equities Research, wrote in a research note following Google's report.

"Taxes are a wildcard for this company," another analyst, who declined to be identified, agreed.

Beyond questions of whether an accounting factor like taxes rather than organic growth is responsible for propping up Wall Street expectations is the long-term trend toward an ever-narrower gap between results and expectations.

Reuters Estimates data shows the level by which Google beats consensus profit forecasts has shrunk to about 10 percent from levels of 15 percent or more up until a year ago. Revenue surprises have steadied to 2 percent to 3 percent above expectations, versus 7 percent to 8 percent in prior years.

"When you have a company that finds itself not substantially exceeding expectations, you are in a situation where Wall Street has effectively caught up with what the company is doing," Dinosaur Research analyst David Garrity said. "In the future, you can't expect the same share gains."