Bloomberg News

Google Sales, Profit Miss Estimates as Ad Prices Decline

January 23, 2012

(Updates with analyst’s comment in fourth paragraph.)

Jan. 19 (Bloomberg) -- Google Inc., owner of the world’s most popular Web search engine, reported fourth-quarter revenue and profit that missed analysts’ estimates, as weaker European demand and a shift to mobile advertising crimped growth.

Sales excluding revenue passed on to partner sites rose to $8.13 billion, Google said on its website. That compared with the $8.41 billion average estimate of analysts, according to data compiled by Bloomberg. Profit before certain costs was $9.50 a share, missing the $10.50 average estimate. The shares plunged as much as 10 percent.

Chief Executive Officer Larry Page is moving into new markets to ignite growth outside Google’s traditional search- based business. That effort contributed to an 8 percent drop in the average price Google gets when users click an ad, because it charges less for ads on mobile devices and in emerging markets, said Herman Leung, an analyst at Susquehanna Financial Group. A stronger dollar also eroded the value of international sales.

“Google is not invincible,” said San Francisco-based Leung, who doesn’t own the stock. “Every company is going to be subject to growing pains.”

Google shares tumbled to as low as $573 in extended trading after the report. They had gained 1.1 percent to $639.57 at the close in New York. The stock climbed 8.7 percent last year.

International Sales

International sales made up 53 percent of revenue in the quarter, down from 55 percent in the third quarter, the company said. Online ad sales in Europe increased about 5 percent in the fourth quarter, compared with a 20 percent increase in the first half of last year, said Clay Moran, an analyst at Benchmark Co., who is based in Delray Beach, Florida.

“In large part, it is due to Europe,” Sameet Sinha, an analyst at B. Riley & Co. in San Francisco, said of Google’s disappointing results. “It could be a protracted slowdown until these clouds go away.”

Total search-based advertising spending in Europe rose 14 percent in the fourth quarter, compared with a 22 percent jump in the U.S., according to IgnitionOne Inc., a digital-marketing company.

Google’s net income rose to $2.71 billion, or $8.22 a share, compared with $2.54 billion, or $7.81 a share, a year earlier, the Mountain View, California-based company said. Operating expenses rose to $3.38 billion, or 32 percent of revenue, in the recent period. In the year-earlier quarter, operating costs equaled 30 percent of revenue, Google said.

“One of the major concerns here is given the performance on the top line, what does the margin picture look like going forward?” said Ken Sena, an analyst at Evercore Partners Inc. in New York, who rates Google shares “overweight.”

The number of total clicks on ads rose 34 percent during the quarter, Google said.

Search Upgrades

The company has been working to offer customers more options in mobile and display advertising, faster-growing markets than search-based ads. Google also has been investing in its search engine to improve the quality of results and bolster market share to stay ahead of Microsoft Corp.’s Bing service.

In December, Google’s share of U.S. searches rose to 65.9 percent from 65.4 percent the previous month, according to ComScore Inc. Microsoft had 15.1 percent of searches, up from 15 percent, while Yahoo! Inc.’s search engine accounted for 14.5 percent.

Google is betting it can maintain its dominance in search by offering users faster, more personal query results. Last year, Google rolled out the “Instant Pages” feature, which aims to cut the time of searches for users by about 2 to 5 seconds.

Social Searching

Earlier this month, Google introduced “Search, Plus Your World,” intended to give users more personalized search results by tapping content from the Google+ social-networking service. The search service lists items that users may have put on Google+ or related results from friends’ posts on the social site, which competes with Facebook Inc. The Google+ service now has 90 million users globally, more than double the amount in October.

Still, Google’s efforts to attract users have drawn regulatory scrutiny. The U.S. Federal Trade Commission is focusing on whether Google unfairly ranks search results to favor its own businesses and increases advertising rates for competitors, a person familiar with the matter said in August.

More recently, the FTC expanded its antitrust probe of Google to include scrutiny of Google+, two people familiar with the situation said last week.

Android

Google, which also develops the Android operating system for smartphones and tablets, has been using acquisitions in the past few years to build up its services for display ads, which features images, videos or animation, and ads on mobile devices.

Last year, Google announced it was buying AdMeld Inc., which offers services to Internet publishers to manage display ads, and in 2010 the company bought AdMob Inc., which specializes in advertising on mobile phones.

The company is on a pace to generate $5 billion in sales from display-based ad revenue a year, Page said on a conference call with analysts today. There are now about 250 million Android devices, he said.

“I’m very happy with our results,” Page said. “Google had a very strong quarter.”

--With assistance from Douglas MacMillan and Aaron Ricadela in San Francisco. Editors: Jillian Ward, Nick Turner

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

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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