In front of Google’s fourth quarter earnings today, call investor enthusiasm was at a fevered pitch. Just prior to the call the stock was at an all time high and closed up at 1.05 percent, ending at 639.57. In fact, the earnings came out at 4:00 p.m. EST and the stock was still rising at 4:30. However, as the call with the analysts began at market close, the stock started to slide big time.   Instant karma set in as analysts decided that the slight miss, on what some are already calling “overly aggressive” expectations, saw the stock at 582.01 down 9.00 percent in after hours trading as of 5:30 p.m. You literally could watch it creep lower in real-time, and the “Google Misses” headlines were popping up like weeds.

This is a classic tale of two stories. As it will be shown below, this was a quarter most companies would kill for, yet CEO and co-founder Larry Page (News - Alert) and crew spent much of the Q&A fending off questions from whining financial analysts who seemed displeased with the company’s performance and less than impressed with the explanation.

Details please! 

Some details from the press release, starting with the obligatory quote from Mr. Page, were as follows:

"Google had a really strong quarter ending a great year. Full year revenue was up 29 percent, and our quarterly revenue blew past the $10 billion mark for the first time…I am super excited about the growth of Android (News - Alert), Gmail, and Google+, which now has 90 million users globally – well over double what I announced just three months ago. By building a meaningful relationship with our users through Google+ we will create amazing experiences across our services. I’m very excited about what we can do in 2012 – there are tremendous opportunities to help users and grow our business.”

Q4 Financial Highlights

First it must be noted that Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC) and in the fourth quarter of 2011, TAC totaled $2.45 billion, or 24 percent of advertising revenues.

Revenues – $10.58 billion in the fourth quarter of 2011, representing a 25 percent increase over fourth quarter 2010 revenues of $8.44 billion. 

Google Sites Revenues – Google-owned sites generated revenues of $7.29 billion, or 69 percent of total revenues, in the fourth quarter of 2011. This represents a 29 percent increase over fourth quarter 2010 revenues of $5.67 billion.

Google Network Revenues – Google’s partner sites generated revenues of $2.88 billion, or 27 percent of total revenues, in the fourth quarter of 2011. This represents a 15 percent increase from fourth quarter 2010 network revenues of $2.50 billion.

International Revenues – Revenues from outside of the United States totaled $5.60 billion, representing 53 percent of total revenues in the fourth quarter of 2011, compared to 55 percent in the third quarter of 2011 and 52 percent in the fourth quarter of 2010.

Operating Income – GAAP operating income in the fourth quarter of 2011 was $3.51 billion, or 33 percent of revenues. This compares to GAAP operating income of $2.98 billion, or 35 percent of revenues, in the fourth quarter of 2010.

Net Income – GAAP net income in the fourth quarter of 2011 was $2.71 billion, compared to $2.54 billion in the fourth quarter of 2010.

Cash – As of December 31, 2011, cash, cash equivalents, and short-term marketable securities were $44.6 billion.

Free cash flow - $3 billion

Headcount – On a worldwide basis, Google employed 32,467 full-time employees as of December 31, 2011, up from 31,353 full-time employees as of September 30, 2011.

As stated above, for anyone else this would be commendable. However, here is what was “missed” and you can judge the severity:

• Gross Revenue: $10.6 billion versus an expected $10.7 billion (Citi estimate not street)
•  Net Revenue: $8.13 billion versus $8.38 billion
•  Non-GAAP EPS: $9.50 versus $10.46
• Non-GAAP Operating income: $4.04 billion
• Google sites gross revenue: $7.29 billion versus $7.52 billion (Citi estimate, not Street)

Not exactly the catastrophe indicated in the afterhours selling.

The tale of the clicks and users

As the 800 pound gorilla of online advertising, the numbers were closely looked at and found wanting as much of the Q&A was spent on the two items below:

Paid (News - Alert) Clicks (PCs) – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of network members, increased approximately 34 percent over the fourth quarter of 2010 and increased approximately 17 percent over the third quarter of 2011.

Cost-Per-Click (CPC (News - Alert)) – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 8 percnet over the fourth quarter of 2010 and decreased approximately 8 percent over the third quarter of 2011.

The concern here was that it seems like Google may be getting more clicks but for less money, which analysts feel should make advertisers somewhat concerned. Page and his team repeatedly pointed out that a variety of factors, many of which they have no control over such as foreign exchange rates, the slowdown in Europe, the shift to mobile ads by users increasingly using their smartphones and the over 30 changes this year to the ad formats translates actually into Google providing advertisers with the ability to better reach their target markets, albeit in some cases with lower cost clicks.

Factoids and call highlights

Some things that came out of the call that were not in the release included:

• Google+ now has 90 million users
• 250 million Android devices in total, up 50 million from November
• Over 11 billion downloads from Android market
• 5000 new enterprise customers are signing up every day
• $5 billion display run rate
• Google, which now has a workforce Page feels is manageable given its scale and scope, has slowed its rate of hiring but is proud of just having topped the Fortune Magazine list of top places to work for the third time

While the majority of questions were about PC and CPC, analysts did manage to shift gears a bit and ask about some other topics. For instance, in response to a question about the monetization of Android, Page responded that, “It is in the early stages.” However, he dodged a question about predicting how many Google+ customers there might be, saying he was pleased with the momentum but would not want to be quoted on a number. He also said that managing identity and making it part of an enriched user experience, including getting access to better info from Facebook and Twitter, were key to growth and that the intention was for Google+ to permeate much of the product line as a way of pleasing both customers and advertisers.

A question about Google Wallet received the response, “We want to be in products people use every day, and people use their wallets every day, so we're going to keep investing in this.” And, that session closed with a note about the Motorola (News - Alert) acquisition to which Page said, “We'll break out Motorola separately so it doesn't affect margins and the like. We've been very clear that Android will remain open, and Motorola will be like any OEM. We've done a great job managing our partner ecosystem and I expect we'll continue to do so.”

A lot to chew on and more to speculate about

There is a lot to ponder here since there is such a temporary divergence between analyst and company perceptions of performance. In addition, I am always amazed on these calls about what was not addressed. For example, the impact of growing governmental interest around the world in anti-trust actions, the status of the various intellectual property challenges, problems with Android competing in the tablet market, the impact of HTML5 and possible developer lack of interest in the market as a place for apps, the arms race going on to dominate the next-generation of video streaming and interaction and the impact of SOPA and PIPA—just to name a few.

Was this a great quarter? By all but Wall Street metrics, it was pretty darn good. As one person commented in a post online, is this “the end of Google as a growth stock”? We shall see. The facts are that this is a company that puts its money into fueling its innovation engine and it might now be the best time to sell Page and his team short. Of course, I am not a financial analyst. In fact, it might be a good time to wait for the dust to settle since the way to make money is to buy low and sell high.   Next quarter’s earnings should be fascinating and hopefully, there is an intersection between expectations and results.