Google Revenue Falls Short of Estimates, Ad Prices Drop

Google Inc.’s costs are rising as the search provider finds it harder to keep up with a shift to advertising on mobile phones and sales fell short of estimates.

Revenue, excluding sales passed on to partners, was $12.2 billion in the first quarter, missing a projection by analysts for $12.3 billion, according to data compiled by Bloomberg.

Google’s audience is steadily migrating to smartphones, where the company gets less money for marketing spots than on desktops and tablets. Facebook Inc. and other rivals are also challenging Google’s dominance in the online market. Even though Chief Executive Officer Larry Page is getting more advertisers to buy promotions, with total volume rising 26 percent, the average price for an ad fell 9 percent.

“Mobile is perceived as the single biggest risk over the near-term,” said Scott Kessler, an analyst at S&P Capital IQ Inc., who has the equivalent of a buy rating on the stock. “Mobile is definitely helping Google and many others in the number of volume-related metrics, but mobile has also had a notable negative impact on pricing.”

Net income rose to $3.45 billion, or $5.04 a share during the first three months of 2014, from $3.35 billion, or $4.97, a year earlier.

Reporting for the first time since Google held a de-facto split of the stock earlier this month, the shares fell as much as 6.4 percent in extended trading. The stock advanced 3.8 percent to $556.54 at the close in New York.

Smartphone Impact

Google is also spending more to expand its services, with costs rising faster than total sales, which rose 19 percent. Expenses climbed 23 percent to $11.3 billion in the latest quarter.

Chief Financial Officer Patrick Pichette said on a conference call that the increase in operating expenses was largely tied to legal costs and other spending related to acquisitions, especially of home-automation service provider Nest Labs. The search company is in good shape amid rising revenue and healthy profits, he said.

“There you have it: strong results -- and the optimism that provides us the confidence to fund strategic growth opportunities,” Pichette said on the call.

Still, smartphones are dragging down prices for digital ads, with smaller screens limiting the number of promotions that can be displayed, while marketers are becoming more selective in using them. The cost per click for search advertising on smartphones dropped 35 percent during the first quarter in the U.S., according to researcher IgnitionOne. Tablets, which have larger screens and are more like traditional desktops, saw ad prices rise 29 percent.

Mobile Transition

“People want to see pricing stabilize,” said Ben Schachter, an analyst at Macquarie Securities USA Inc. who has the equivalent of a buy rating on the shares. “It’s going in the right direction, at least, but it’s still declining. Across the board, things were just a little bit softer than we would like.”

Google remains optimistic about its prospects. Nikesh Arora, chief business officer, said during the call with analysts that he expects wireless-gadget pricing to eventually outpace the traditional desktop spots.

“In the medium to long-term, mobile pricing has to be better than desktop pricing,” Arora said. “In mobile, you have location, and you have context of individuals which you don’t have in the desktop.”

New Growth

Google’s other revenue, which includes the mobile Play store and hardware such as Chromecast, rose 48 percent from the year ago-period to $1.55 billion.

Google is investing in new products to drive future growth. The company is licensing hotel-booking software from Room 77 Inc., a startup backed by Expedia Inc. With Room 77, Google can cater to travelers looking to quickly book hotels, the most lucrative part of online travel.

It also is further rolling out its broadband services. In February, Google said it was initiating talks with nine U.S. metropolitan areas about bringing its high-speed broadband Internet service to consumers.

The company is also set to expand advertising services. For YouTube, its video-sharing service, Arora said Google would be offering customers guaranteed audiences under a new program. The advertisers will get access to some of the most premium content on the site, he said.

Google is also willing to back away from investments that aren’t working as well. It is selling its Motorola smartphone unit to Lenovo Group Ltd. for $2.91 billion, after buying it for more than $12 billion in 2012. Google, which still retains patents, said Motorola had a loss of $198 million on a discontinued basis.