Google Inc. (GOOGL) Q1 2014 Earnings Report Misses Estimates As Earnings Rise, Profit Margins Down (GOOG)

Investors punished Google Inc. (NASDAQ:GOOGL)(NASDAQ:GOOG) on Wednesday for not meeting Wall Street's expectations and moving too slowly as its advertising sales shift from desktop to mobile devices. The Mountain View, Calif., company reported $4.3 billion in profit for the three months ending March 31, up from $3.7 billion in the same period a year ago but short of the $4.38 billion expected by analysts.

Shares fell 5.7 percent in after-hours trading immediately after Google reported its first-quarter results, which showed adjusted earnings per share of $6.27, which analysts polled by Thomson Reuters Eikon had expected to rise as high as $6.39. Investors were also disappointed that advertising revenue is failing to grow as quickly as expected.

Google’s users are increasingly accessing its sites on smartphones, where ads currently provide less revenue than on tablets and desktops. Last summer, the company instituted a series of changes to its ad policy, known as Enhanced Campaigns, to stem the decline in advertising prices that was decreasing profits. Google began refusing to differentiate from clicks on tablets and those on desktops, and started encouraging customers to also buy ads for mobile devices.

Google's core ad business shows signs of slowing, as the number of paid clicks on Google ads climbed 26 percent, less than the 29 percent the Street wanted to see. Further, the company’s average ad prices declined more than anticipated: Google’s cost per click fell 9 percent compared with the 8 percent expected.

Google was able to beat expectations in the last half of 2013 thanks to steady growth in the number of times visitors clicked on an ad, which offset falling ad prices. However, the company's click growth from January to March also dipped, worrying investors that it was slowing down.

Google spent $12.25 billion in expenses for the first three months of 2014, 23 percent more than it did in the same period last year. During a conference call to discuss the earnings, Google said this rise was largely fueled by some costly recent acquisitions – it spent $3.2 billion on Nest Labs in January – and the increased head count, from 47,756 in December to 49.829 in March, that came with those purchases.