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Google CFO warns of slow growth

By Eric Auchard

NEW YORK (Reuters) - Google Inc. Chief Financial Officer George Reyes said on Tuesday that advertising revenue growth is bound to slow, sparking a sell-off of as much as 13 percent in the Web search leader's volatile stock.

However, late in the day on Tuesday, the company issued a statement to reaffirm that it still sees plenty of room to improve on how it makes money selling advertising alongside its popular Web search results.

Reyes told an investor conference that Google's growth will depend on factors such as further audience gains, increased spending by advertisers or moves into new markets instead of counting on improvements the company makes in its Web search advertising business, which drives over 97 percent of sales.

"Most of what is left is just organic growth," Reyes said on a Webcast from the Merrill Lynch Internet Advertising conference in New York.

"Clearly our growth rates are slowing. We see that each and every quarter," he said. "We are going to have to find new ways to monetize the business."

Organic growth relies on factors such as overall Internet users or the number of Web search queries, instead of Google's own efforts to generate higher sales, like modifying its pay-per-click ad system to put more ads on search pages.

"We still see significant opportunities to improve monetization and intend to continue to focus our efforts in this area," the company said in its statement.

Google shares dropped as much 13 percent, or more than $50 in heavy trading, before recovering to close down $27.76 at $362.62 on Nasdaq, a decline of 7.1 percent.

Because Google, unlike most large publicly traded U.S. companies, has a policy of not commenting on its financial targets, its share price has reacted wildly to indications on its performance.

In late January, after Google reported disappointing fourth-quarter results, its shares fell as much as 19 percent.

Google shares started to bounce back on Tuesday after bullish analysts stepped up to defend the stock.

Separately, market research firm comScore Networks Inc. published data from January showing Google added 6.3 points of share in the past year to 41.4 percent of the U.S. Web search market. During the same period, the number of U.S. Internet searches grew 10.7 percent to 5.48 billion lookups.

Meanwhile, the Web search share of Yahoo Inc. fell 3.1 percent to 28.7 percent and for Microsoft Corp. and its MSN sites it dropped 2.3 percent to 13.7, comScore said.

Reyes said the "law of large numbers," the statistical observation that growth rates tend to slow as numbers get bigger, was starting to drag on Google's prospects.

"I am not turning bearish at all," Reyes said in response to a question. "I think we have a lot of growth ahead of us. The question is: At what rate?" he said.

Google reiterated that its financial filings have cautioned its growth rate has generally declined over time as a percentage of revenues.

Ben Hunt, a buy-side analyst with Iridian Asset Management LLC, who watched the Google presentation, said Reyes introduced doubts at the last minute after an otherwise upbeat speech.

"I thought his comments were bullish until, at the very end, he said that because of 'the law of large numbers,' there is going to be challenges to their revenue growth rate."

The sudden drop in Google shares spurred wide selling in the 45-component American Stock Exchange Internet Index, which lost more than 3 percent.

Shares of Chinese Web search company Inc. fell 5.3 percent to $51.42, online auction company eBay Inc. lost 3 percent to $40.06 and Yahoo Inc., fell 2.1 percent, to $32.06.

Reyes' comments came two days ahead of the company's highly anticipated annual analyst meeting, which added to the volatility of investors' response.

Merrill's Fine said Reyes comments showed that while the company's focus was still on its core Web search and pay-per-click advertising business, he expected new services to help Google increasingly begin to diversify its revenue.

(Additional reporting by Kenneth Li, Euan Rocha and Ed Tobin in New York, Doris Frankel in Chicago and Peter Henderson in Los Angeles)

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