Google Surprises Wall Street, but Not in a Good Way

Shares fall 9 percent after earnings

Expectations were high for Google's earnings call Thursday, but instead of blowing analysts away with dizzying gains, the Internet giant dropped a rare disappointment: lower than anticipated earnings and revenue.

The company reported earnings per share of $9.50 and net revenue of $8.13 billion, but according to Yahoo Finance, analysts polled were expecting, on average, earnings per share of $10.50 and net revenues of $8.41 billion. The lower returns knocked Google’s share price down 9 percent in after-hours trading.

Even though paid clicks rose 34 percent year over year, cost per click (CPC), or the average amount paid by advertisers when someone clicks on an ad, fell 8 percent year over year.

"For the street, it was a little surprising," said Herman Leung, an analyst with Susquehanna Financial Group (which is a market maker in Google securities and owns 1 percent or more of Google stock).

Leung said he had expected a weakness in CPCs because of adjustments Google made to ad quality last year, which affects cost per click. But he said he didn't expect it to be down so much. The last time Google reported a decline in CPCs was the third quarter of 2009, he added.

On the earnings call, analysts repeatedly pushed Google to explain what happened—so insistently that, at one point, CEO Larry Page said, “Maybe we can get our next question not about CPCs.”

Susan Wojcicki, Google’s senior vice president of advertising, said the CPC issue stemmed from varying foreign exchange rates and changes to ad quality. Those changes led to an increase in paid clicks—a sign, Wojcicki said, that the ad system is working—but they also led to a lower cost per click.

Analysts believe the lower CPCs are also the result of a shift to mobile and other emerging formats.

“It wasn’t a great quarter,” said Leung. “It was sub par.”

But Google's report also included a healthy serving of good news. "Our quarterly revenue blew through the $10 billion mark for the first time," said Page, referencing the company's quarterly revenue of $10.58 billion, which was up 25 percent year over year.

The company also reported significant gains in its display advertising business.

“We’ve brought the science of search to the art of display,” Page said. According to the company’s latest figures, Google’s display business has reached an annualized run rate of more than $5 billion, which is up from $2.5 billion in the third quarter of 2010 (the last time Google shared the number).

In a note, Gene Munster, an analyst with Piper Jaffray, said Google’s display advertising statistic suggests $1.25 billion in revenue in the last quarter, which is about 12 percent of total revenue. That means Google’s display business could be twice the size of Yahoo’s, he said.

Android was another bright spot. During the call, Page said, “Android is quite simply mind boggling.”

About 700,000 phones are activated every day, for a total of 250 million Android devices worldwide, he said, adding that more than 11 billion apps have been downloaded for Android Market.

As for Google+, Page said the company has been releasing a new feature every day, for a total of 200 updates since the product launched in June. He also said the social service had spread to more than 90 million Google+ users, 60 percent of which engage with the site daily and 80 percent of which engage with the site weekly.


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