Google Profit Exceeds Expectations

When Google announced its fourth-quarter earnings on Tuesday, investors were watching closely for positive signals of Google’s progress in the evolution to a mobile world.

There was some evidence that Google was making progress on a crucial challenge: a decrease in the price that advertisers pay Google each time someone clicks on an ad, known as cost per click. The trend has been driven by the increasing use of Google on mobile devices — where advertisers largely pay less for ads — at the expense of the desktop computer.

On Tuesday, Google said the price per click rose 2 percent from the previous quarter, though it was still 6 percent lower than in the year-ago quarter, making it the fifth consecutive quarter of year-over-year decline.

The earnings report was greeted warmly by investors in after-hours trading, though analysts emphasized that the results were mixed. The company exceeded their expectations on profit, but disappointed on revenue. That was at least in part because analysts are still figuring out how to account for Motorola Mobility, the struggling cellphone maker that Google acquired last year.

Larry Page, Google’s chief executive and co-founder, was optimistic in a statement.

“In today’s multi-screen world we face tremendous opportunities as a technology company focused on user benefit,” he said. “It’s an incredibly exciting time to be at Google.”

The company reported fourth-quarter revenue of $14.42 billion, an increase of 36 percent over the year-ago quarter. Net revenue, which excludes payments to the company’s advertising partners, was $11.34 billion, up from $8.13 billion.

Net income rose 13 percent to $10.65 a share.

The fourth quarter is generally Google’s brightest because it makes much of its money on retail ads that run during the holiday shopping season. Analysts had expected revenue of $10.47 a share, on revenue of $12.3 billion. Google warned last week that analysts’ expectations were off target because Google sold Motorola’s set-top box division during the quarter so it did not include it in the quarterly results. Still, even including that division of Motorola, Google’s revenue would have missed expectations.

Shares of Google, which fell slightly during the day, were up 4 percent in after-hours trading. “This is supposed to be Google’s quarter to shine, the December quarter, and we’re going to have it all mucked up by Motorola,” said Colin Gillis, an analyst at BGC Partners.

This holiday season was the first that Google charged e-commerce companies to be included in its comparison shopping engine, and these so-called product listing ads contributed to its bottom line.

“Q4 retail is absolutely crucial for Google’s earnings,” said Sid Shah, director of business analytics at Adobe, which handles $2 billion in annual advertising spending. “Despite talk about retail having a weak season, Google’s product listing ad program has taken off quite successfully.”

Nonetheless, Google’s mobile challenge overhung even its usual holiday shopping sparkle. Consumers are increasingly shopping on phones and tablets, yet Google and other companies have not yet figured out how best to profit from mobile users.

“You would expect Google to be a key player benefiting from mobile, but that hasn’t played out in the last year,” said Jordan Rohan, an analyst at Stifel Nicolaus.

One problem is that advertisers pay about half as much for an ad on a mobile device, in part because they are not yet sure how effective mobile ads can be.

Another challenge for Google is that consumers increasingly use apps, like Yelp or Kayak, to search on mobile devices instead of using Google. Even when consumers use Google for mobile searches, they are often doing so on Apple devices like iPhones, for which Google has to pay Apple a fee.

This shift is happening as Google’s biggest, most lucrative business — desktop search — is slowing. The share of clicks on Google results that happen on desktop computers has fallen to 73 percent from 77 percent in the last six months, while the share of clicks on tablets and smartphones has increased to 27 percent from 23 percent, according to data from Adobe.

Meanwhile, Google has a new competitor in search: Facebook, which last week introduced a new form of personalized social search on the site.

Google has also recently become a maker of mobile devices, both by acquiring Motorola and by producing the line of Nexus devices with manufacturer partners. In the fourth quarter, Google sold about 1.5 million Nexus phones and tablets, not including those sold by other retailers, according to estimates from JPMorgan.

In the fourth quarter, a weight was lifted from Google when the Federal Trade Commission closed its antitrust investigation of Google’s search practices. But it remains under investigation in Europe, where the outcome is expected to be harsher.

Article source: http://www.nytimes.com/2013/01/23/technology/google-profit-exceeds-expectations.html?partner=rss&emc=rss