Google Inc’s quarterly results fell well short of Wall Street’s expectations
after its core advertising business slowed, stunning investors accustomed to
consistently rapid growth from the internet giant and wiping more than 9 percent
off its market value.
The disappointing numbers on Thursday came hours ahead of schedule in a rare
instance of premature filing. Google blamed the misfire on an unauthorised
filing by its financial printers, RR Donnelley & Sons Co, and later
confirmed the numbers’ accuracy.
The earnings
report, which had not been expected until after the market close, revealed a
weakening in Google’s core Internet advertising business and persistent losses
at its recently acquired cellphone business, Motorola Mobility.
Shares of Google, the world’s No. 1 internet search engine, finished
Thursday’s regular trading session down 8 percent at $695 after a brief trading
halt. Some analysts said the inadvertent results release spurred confusion and
exacerbated its stock price decline.
Google executives maintained in a conference call on Thursday that the
company’s various businesses continued to benefit from healthy growth and that
Google was well-positioned to capitalize on consumer’s increasing use of mobile
devices.
Chief executive Larry Page, speaking on his first earnings call since an
unspecified voice ailment sidelined him from public speaking in June, said that
Google’s mobile business was now generating revenue at an annualised run rate of
$8 billion.
Page acknowledged that mobile ad rates were below the rates that Google
garners for ads that appear on its standard website. But he said the variety of
Web-connected devices used by consumers is creating “a huge new universe of
opportunities for advertisers.”
“We’re uniquely positioned to get through that transition and to really
profit from it,” Page said, citing Google’s Android mobile software, the world’s
top operating system for smartphones by market share.
Google, which has been struggling to turn around a Motorola Mobility hardware
business it bought for $12.5 billion, reported a 20 percent dive in net income
to $2.18 billion. Excluding certain items, it earned $9.03 a share, vastly
underperforming the $10.65 analysts had expected, on average.
“We have been saying this thing was ripe for a pullback. It’s not like
they’re Google not being Google, but you still have some major issues,” said BCG
analyst Colin Gillis.
“Click prices declined for the fourth consecutive quarter after rising for
eight consecutive quarters before then. That’s a negative. This is the mobile
problem.”
“The other bit is the Motorola millstone had been ignored by the market, and
– boom – now you’ve got weak revenue from Motorola. When you acquire a business
and you’re about to whack all kinds of people and close offices, you know what
happens to the employees? They take their eye off the ball. Sales are down,”
Gillis explained.
Net revenue growth at Google’s main Internet business increased 17 percent
year-over-year, the first time growth in that business has fallen below 20
percent since 2009. Google finance chief Patrick Pichette stressed on the
conference call that the revenue growth rate was higher if the impact of foreign
currency exchange rates was backed out.
“It was just too rapid a deceleration,” said Pivotal Research Group analyst
Brian Wieser. “Many of the same underlying trends drive Facebook
advertising.”
Shares of Facebook Inc, which headed south shortly after Google’s inadvertent
filing, closed down 4.6 percent. Google’s snafu recalled Facebook’s debut, which
was marred by technical glitches that also spooked traders and contributed to
the stock’s first-day decline.
The decline in Google’s shares come after a three-month run-up in its stock,
which reached an all-time high of $774.38 earlier this month.
Google reported net revenue – excluding traffic acquisition costs – of $11.3
billion for the third quarter, below Wall Street’s expectations for about $11.9
billion.
For the fourth consecutive quarter, the company reported a decline in average
cost-per-click (CPC), a critical metric that denotes the price advertisers pay
Google.
Average CPC declined 15 percent from a year ago and 3 percent from the second
quarter of this year. Analysts say that Google, like many of its peers in the
Internet industry, has been struggling to adapt to the rapid consumer uptake in
mobile devices. Advertisers pay far less for ads on smartphones and tablets than
for similar ads on desktop computers.
“The core business seems to have slowed down pretty significantly, which is
shocking,” said B. Riley analyst Sameet Sinha. “The only conclusion I can look
at is, search is happening more and more outside of Google, meaning people are
searching more through apps than through Google search.”
“That could indicate a secular change, especially when it comes to ecommerce
searches. The big fear has always been, what if people decide just to go
straight to Amazon and do their searches? And potentially that’s what could be
happening.”
But Ryan Jacob, chairman and chief investment officer of Jacob Funds, said he
viewed Google’s results as only “minorly disappointing,” with most of the
weakness coming from Motorola as expected.
“Unfortunately, by dropping an 8K in the middle of a trading day, people kind
of shoot first, ask questions later,” said Jacob, whose fund owns Google
shares.
JP Morgan analyst Doug Anmuth said in a note that the Google results were
“light” but not as bad as they appeared at “first blush.”
FILING SNAFU
Google, which recently overtook Microsoft Corp to become the second-largest
U.S. technology company by capitalization, had been due to release its results
after the market close.
The second paragraph of the press release merely read “Pending Larry quote,”
suggesting that space was reserved for comment from CEO Larry Page.
“Earlier this morning RR Donnelley, the financial printer, informed us that
they had filed our draft 8K earnings statement without authorization,” Google
said in a statement. “We have ceased trading on NASDAQ while we work to finalize
the document. Once it’s finalized we will release our earnings, resume trading
on NASDAQ and hold our earnings call as normal at 1:30 PM PT.”
Shares of RR Donnelley, the U.S. printing services company, slid as much as 5
percent. They closed down 1 percent at $10.76.
Reed Kathrein, a plaintiff lawyer with Hagens Berman who sues companies on
behalf of investors, said investors would not have a claim against either Google
or RR Donnelley because the earnings disclosure was likely a mistake.
“There’s no fraudulent intent here,” Kathrein said.
However, Google could have a negligence claim against RR Donnelly to recover
any additional costs it incurred in responding to the incident, Kathrein
added.
“Everyone is trying to figure out if there’s any legal issue with respect to
RR Donnelley,” said Michael Matousek, senior trader at U.S. Global Investors
Inc, which manages about $3 billion in San Antonio.
Follow us on
