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Google Shares Drop as Shift to Mobile Curbs Ad Prices

July 18 (Bloomberg) -- Jon Erlichman reports on Google's earnings report on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Google Inc. (GOOG) shares fell the most in four weeks after the owner of the most popular Internet search engine reported second-quarter sales and profit that missed estimates as mobile advertising crimped average prices.

Revenue, excluding sales passed on to partner sites, was $11.1 billion, Google said yesterday on its website. That compared with an average analyst estimate of $11.3 billion, according to data compiled by Bloomberg. Profit before certain items was $9.56 a share, less than the average projection of $10.80. The shares slid as much as 3.9 percent.

Google’s average cost per click, a measure of advertising rates, fell 6 percent as more marketers aimed to reach consumers through smartphones and tablets instead of desktop personal computers. While the company has been adding tools for customers to reach mobile Web surfers, such as ads tied to searches and YouTube videos, those efforts are still gaining steam, and Google is boosting investment to help them catch on.

“The challenge is for Google to reignite revenue growth as their existing businesses start to mature,” said Colin Gillis, an analyst at BGC Partners LP in New York, who rates the shares hold. “The core business is slowing down.”

Photographer: Victor J. Blue/Bloomberg

Google Inc. signage is displayed outside of the company's headquarters in New York. Google is making moves to attract more users to its mobile services, which in turn is aimed at boosting advertising. Close

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Photographer: Victor J. Blue/Bloomberg

Google Inc. signage is displayed outside of the company's headquarters in New York. Google is making moves to attract more users to its mobile services, which in turn is aimed at boosting advertising.

Google declined 1.6 percent to $896.60 at the close in New York, the biggest decline since June 20. The shares have advanced 27 percent this year.

The average smartphone-based search ad costs 40 percent less than a comparable promotion on a desktop computer, according to Covario Inc., a digital-marketing agency.

Total Clicks

Second-quarter net income, which includes results from discontinued operations, increased 16 percent to $3.23 billion, or $9.54 a share, from $2.79 billion, or $8.42, a year earlier, Google said. Operating expenses amounted to 35 percent of total revenue, compared with 33 percent a year earlier, and the company’s effective tax rate was 24 percent.

“We’re in the midst of another round of investing in the business,” said Josh Olson, an analyst at Edward Jones & Co. who has a buy rating on the stock and doesn’t own it. “This is not unusual for Google.”

The average cost per click -- the amount that advertisers paid each time a user clicked on a promotion on Google’s sites and those in its network -- decreased more than the 3 percent drop analysts had predicted, according to data compiled by Bloomberg. It followed a 4 percent decline in the first three months of the year. The total number of paid clicks jumped 23 percent, after a 20 percent gain in the first quarter. Analysts were projecting a 19 percent increase in the recent period.

Generating Ideas

The company has a lot of big opportunities in the market as more users adopt mobile devices and other innovative technologies, Chief Executive Officer Larry Page said on a call with analysts.

“It’s pretty easy to come up with ideas. It’s pretty hard to make them real and get them to billions of people,” he said. “I wish we could snap our fingers and just do a tremendous amount more instantly, but the reality is it’s hard work to scale, and that’s what we do.”

In February, Google unveiled new mobile-advertising products that push customers to buy more marketing messages for wireless devices. The features, which had been optional, will become mandatory later this month, helping advertisers target mobile users based on location or at different times of day.

The new system is “one of the biggest changes to its ad system since company inception, and should simplify the ability for marketers to acquire customers across multiple screens,” Ross Sandler, an analyst at Deutsche Bank, wrote in a note earlier this month. He rates Google shares a buy.

Waze Acquisition

Google is also making moves to attract more users to its mobile services, which in turn is aimed at boosting advertising. Last month, the company announced the purchase of Waze, a mobile application that helps users find routes on interactive maps. Google paid about $1.1 billion for Waze, people with knowledge of the agreement said. That would be the fourth-largest deal for the company, according to data compiled by Bloomberg.

Google also has been improving and expanding its Android operating system for smartphones. The software commands more than 70 percent of the market, while Apple Inc., maker of the iPhone, has less than 20 percent, according to researcher IDC.

Moto X

One Android partner is Motorola Mobility, which Google acquired last year for $12.4 billion. The business is slated to release a new phone called the Moto X this year under new Google leadership. The device will use two processors to conserve battery life and will include sensors to help it better understand what a user needs, Motorola Mobility Chief Executive Officer Dennis Woodside said in May.

Google’s report came two days after Web rival Yahoo! Inc. said quarterly revenue also fell short of analysts’ estimates amid weakness in advertising. Yahoo’s sales of display ads decreased 12 percent, driven in part by advertisers paying lower prices per promotion.

Facebook Inc. (FB), owner of the world’s largest social-networking service, reports results next week amid continued scrutiny of its efforts to make money from users who visit its website on wireless devices. In the first quarter, mobile made up about 30 percent of Facebook’s advertising revenue.

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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