Google Boosts Ad Volumes to Counter Mobile Price Declines

As Google Inc. (GOOG) navigates a shift to mobile promotions from pricier search-based ads on desktops, it is relying on a simple maxim: volume, not just price.

The stock jumped a record 11 percent after Google yesterday posted third-quarter sales and profit that topped analysts’ estimates. While Google struggles with declining mobile premiums, it’s staving off a dent in revenue by selling more ads at a faster rate. The volume of clicks on advertisements climbed at the fastest pace this year, compensating for a drop in average-ad prices.

Google stepped up investments to boost capacity and introduce services that encourage marketers to direct more spending toward wireless devices. The upshot: the Web company is on track to make up 33 percent of the global online-advertising market this year, up from 31 percent last year, according to EMarketer Inc.

“As long as we continue to see that higher-than-expected volume coupled with the lower pricing, I’m OK with it,” said Josh Olson, an analyst at Edward Jones & Co., who rates the stock a buy. “It just signals they have good demand for that mobile business.”

Google, based in Mountain View, California, jumped to $979.32 at 9:39 a.m. New York time. The stock had gained 26 percent this year through yesterday, while the Standard & Poor’s 500 Index gained 22 percent.

Photographer: Krisztian Bocsi/Bloomberg

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Photographer: Krisztian Bocsi/Bloomberg

Google is stepping up investments to boost capacity and introduce services that encourage marketers to direct more spending toward wireless devices.

Revenue, excluding sales passed on to partner sites, was $11.92 billion, the company said in a statement on its website yesterday, exceeding the average analyst projection for $11.64 billion, according to estimates compiled by Bloomberg. The volume of clicks on ads jumped 26 percent, making up for an 8 percent decline in average-ad prices.

Profit Engine

Profit excluding certain items was $10.74 a share, topping analysts’ average projection of $10.36. Net income rose 36 percent to $2.97 billion from the year-earlier period.

The push to boost volumes -- which rose 23 percent in the second quarter and 20 percent in the first -- took its toll on Google’s gross profit margin, which shrank to 56.9 percent, the lowest level this year, according to data compiled by Bloomberg. Operating expenses jumped 9.3 percent during the quarter, though they made up a smaller piece of sales. That’s happened as click-price declines have widened, from 6 percent in the second quarter and 4 percent in the first.

New Ad Service

The search provider has been working to address falling prices. The company earlier this year introduced a new advertising service called “enhanced campaigns,” encouraging marketers to funnel more of their spending to wireless devices.

The campaigns and other initiatives should help average ad prices recover in the next year or so, according to Victor Anthony, an analyst at Topeka Capital Markets Inc.

“The results clearly demonstrate that Google remains kind of the best of breed, best of class in the online advertising space, really within the Internet space itself,” Anthony said.

Revenue at Google’s sites, including the search page and YouTube, expanded 22 percent, faster than the 18 percent in the previous quarter.

“My goal was to ensure that Google maintains the passion and soul of the startup as we grow,” Chief Executive Officer Larry Page said in a call with analysts yesterday. “That’s why I worked so hard to increase the velocity and execution.”

Page, who became CEO in 2011, also said that he won’t join every earnings call in the future, citing a need to prioritize his time. The co-founder last missed a call in July 2012 after he lost his voice, which forced him to miss other company events as well. In May, Page disclosed a health condition resulting in hoarse speech and labored breathing, noting that it wouldn’t impede him from running the company.

Ad Growth

Google is also spending on investments, mainly for equipment, data centers and real estate. Capital expenditures rose to $2.29 billion from $1.6 billion in the second quarter.

“They continue to grow -- for a company this size, very solid growth, still very profitable despite all the investments they’re making,” said Colin Sebastian, an analyst at Robert W. Baird & Co. who rates the stock the equivalent of a buy.

Google is making other changes. Earlier this month, the search provider said it would update its marketing rules to allow users’ names and photos to be used in more promotions.

The company and Facebook Inc. (FB) are taking market share from Yahoo! Inc. (YHOO), which earlier this week reported a decline in revenue, while profit was bolstered by the Web portal’s stake in China’s Alibaba Group Holding Ltd.

Google is pushing for better results in other areas, including in hardware. Its Motorola mobile unit, which the company bought last year in its biggest acquisition ever, announced a flagship Moto X smartphone in August, an effort to boost sagging market share. Revenue in the division declined 34 percent to $1.18 billion.

“Google has a lot of things going for it,” said Sameet Sinha, an analyst at B. Riley & Co, who rates the stock a buy and doesn’t own it. “Google has its fingers in every pie.”

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

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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