Google Sales Miss Highlights Mobile Transition Challenge

Google Inc. isn’t immune to setbacks caused by the global shift to mobile computing.

Costs are rising and Google said yesterday that revenue, excluding sales passed on to partners, was $12.2 billion in the first quarter, another stumble as the company missed a projection by analysts for $12.3 billion, according to data compiled by Bloomberg.

Facebook Inc., Intel Corp. and Microsoft Corp. are also struggling to change their businesses to appeal to consumers and businesses spending more money on smartphones and tablets. Google’s audience is migrating to smartphones, where the company gets less ad money for marketing spots than on desktops and tablets. While Chief Executive Officer Larry Page boosted the number of promotions by 26 percent, average prices slipped 9 percent.

“Obviously mobile’s growing faster than desktop,” said Gene Munster, an analyst at Piper Jaffray Cos. who has the equivalent of a buy rating on the stock. “The core questions that investors are dying to answer is just how that gap closes. They’re not showing it in the results yet.”

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.

Google shares fell 3.7 percent to $536.10 at the close in New York. Google’s report was its first since a de-facto split of the stock this month.

Smartphone Impact

“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.”

Facebook’s stock by dropped more than half in the months after going public in 2012 due to investor concerns it wasn’t making enough money from mobile ads. Microsoft recently changed its CEO after stumbling in its efforts to deliver mobile products and services. Intel earlier this week reported that its mobile chips business, which CEO Brian Krzanich has called critical to its growth, had an operating loss of $929 million in the latest quarter.

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.

Mobile Transition

Chief Financial Officer Patrick Pichette said on a conference call yesterday 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.

New Growth

“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.”

Other revenue at Google, 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.

Ad Expansion

The company is also set to expand advertising services. For YouTube, Google’s video-sharing service, Arora said the search provider will offer 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.

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