"In looking at 2007, we're very, very pleased with our year," said CEO Eric Schmidt in an upbeat conference call for investors.
Investors appeared to be less than pleased. Google's shares, falling short of Wall Street's high expectations, slid in after-hours trading.
Google reports gross revenue without deducting traffic acquisition costs (TAC), the portion of Google's revenue shared with its advertising and publishing partners. In the fourth quarter, those costs rose to $1.44 billion, up from $1.22 billion in the third quarter. TAC amounted to 30.3% of advertising revenue the fourth quarter, compared with 29.1% in the third quarter.
Google's TAC had been trending downward. In the first quarter of 2005, it was 37.2%. It was 31% in the first quarter of 2007, 29.9% in the second quarter, and 29.1% in the third quarter. Google CFO George Reyes attributed the fourth-quarter TAC spike to contractual payments to certain large sites and added that social networking ad inventory has not been performing as well as expected.
In August 2006, Google entered into a deal to provide advertising on social networking site MySpace for more than three years. The deal calls for Google to guarantee Fox Interactive, the owner of MySpace, a minimum of $900 million, provided certain conditions are met.
Google co-founder Sergey Brin declined to talk about whether it was the MySpace deal that boosted Google's TAC but acknowledged, "We have had a challenge in Q4 with social networking inventory as a whole." He nonetheless considers social networking sites "a big opportunity" because of the large ad inventory.
Schmidt emphasized Google's strong international growth. "More than half our search traffic is now outside the U.S.," he said, noting that Google now has offices in more than 20 countries.
International revenue amounted to $2.32 billion for the quarter. This represents 48% of total fourth-quarter revenue, compared with 44% in the fourth quarter of 2006 and 48% in the third quarter of 2007.
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