Google Turns in Soft Quarter as Search Shifts to Mobile

Motorola and Surging Mobile Usage Are Main Culprits in Relatively Weak Earnings

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Google's profits fell 20% last quarter, but CEO Larry Page led with the good news on a hectic day for the company: mobile is now an $8 billion run-rate business and the company cleared a big revenue milestone.

Larry Page

"At just 14 years old, we cleared our first $14 billion revenue quarter," Mr. Page said. "Not bad for a teenager."

The big numbers masked a less-than-dazzling quarter, however, and Google missed both revenue and profit estimates and released its earnings hours early in a gaffe it blamed on the printer. As Mr. Page noted, "I'm sorry for the scramble today."

Google's profit, excluding some items, was $9.03 a share on revenue of $11.3 billion. Analysts on average had estimated profit of $10.65 a share on sales of $11.8 billion.

There were still two obvious culprits responsible for the company's performance last quarter. The most glaring is Motorola, which was only officially acquired in May and posted a $527 million operating loss. The other is mobile search, a fast-growing share of Google's core business that makes its money at a significantly lower average cost- per-click than desktop searches.

While the volume of clicks grew 33% from a year ago, the average amount advertisers paid each time a user clicked on a search ad declined 15% from the previous year and 3% from the second quarter.

But observers noted that 's a temporary situation as advertisers follow users to mobile. "Consumers have leapt to mobile search in greater quantity and faster in aggregate than advertisers have," said Bryan Wiener, CEO of 360i. "I think it's very clear that advertisers are going to follow the eyeballs."

Others agreed that falling cost-per-click is a temporary situation that will remedy itself as advertisers become more sophisticated.

Marin Software's director of research and partnerships Gagan Kanwar thinks more widespread adoption of technologies such as Google Wallet will eventually prove what mobile ads can actually spur people to do, such as eat in a restaurant they've looked up a listing for. "As we get better technology, the dots between online advertising and offline conversions will star to connect, and as that happens advertisers will see more value ... and CPCs will rise up to the natural level of equilibrium they should," he said.

Trip Chowdhry, managing director at Global Equities Research, thinks larger macroeconomic factors could also have been a factor. "It seems like in the last month of the quarter, macro conditions may have deteriorated in Europe and the U.S., and customers may have pulled in," he said.

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