Google Misses On Earnings Amid Slowdown In Paid Clicks

Google Inc. reported revenue up 20 percent in the third quarter, but a slowdown in paid clicks and higher expenses hit earnings, which fell short of estimates. Shares of the search giant fell 3 percent in after-hours trading.

Google is struggling with the shift of search advertising from desktop PCs to mobile devices; advertisers pay less of clicks on mobile ads because they lead to fewer sales. Two of the key concerns for this quarter's results were paid clicks and cost per click (CPC). Paid clicks were expected to rise 22 percent, but only rose 17 percent. CPC is down 2 percent year-over-year from the third quarter of 2013, but remains steady from last quarter.

RBC Capital Markets analyst Mark Mahaney said a cost-per-click decrease by less than 2.5 percent is good news for the company.

The company turned in a profit of $2.28 billion, down from $2.97 billion a year ago. Earnings per share came in at $6.35 versus the expected $6.53, excluding stock-based compensation and other expenses. Revenue grew 20 percent from the prior year to $16.52 billion, which was slightly short of the $16.57 billion expected by analysts polled by Thomson Reuters.

Headcount at Google reached 55,030 employees during the quarter, up from 52,069 a year ago. "We focus our hiring in our tech payroll," said CFO Patrick Pichette. "As we bring on people, we focus on the areas that make a fundamental difference to Google, and this skews to engineering and R&D. This isn't a new run rate for us or anything, it's that most of these college students end up landing here in Q3."

Some other highlights from the earnings call:

Google Express: "We're trying to learn a lot. Innovation is a messy process," Chief Business Officer Omid Kordestani said. "We're trying to find price points that consumers find attractive. Our goal is to take it a step at a time and see if we can deliver this in the best way." When asked about how the service might evolve over time: "There's an issue surrounding scale, tools, and efficiency. For efficiency you need centralization. We're clearly focused on that, and it's part of the business case we're building."

On the health of the search business and what's driving CPC deceleration: "We don't give breakdowns of Google sites, but actually it's pretty healthy on all dimensions," Kordestani said. "That's what you see in our 20% year-over-year growth. From that perspective we're pretty happy on that front. On CPC, monetization overall is still very strong, still happy with monetization."

On what Google knows about its newest users: "Emerging markets are fundamentally different from developed," Kordestani said. "In countries like Indonesia, people go straight to mobile. That's why you see us launch things like Android One."

On the strength of mobile search: "It's very clear that mobile is still a big part of our growth and we're pleased about it," Kordestani said. "A couple things: We have to look at the growth in volume and pricing. These are long-term trends we're seeing."

On mobile payments: "Our goal [with Google Wallet] is in achieving mass merchant adoption," said CFO Patrick Pichette. "It makes it easier for consumers to replace wallets with their smartphones. We're developing a fully functional payment system. Friends can send money through Gmail and Buy With Google button makes it possible to buy something with two clicks."

On marketing's digital shift: "Users are accessing internet on large screens with broadband speeds. We've seen a shift where marketers who've built their brands on television are shifting to digital. Regarding YouTube, our focus is on investments in more content and creativity. What Facebook is doing with video is helping us bring more attention to this space. We're going to continue investing in our platform -- we have 400 hours of content uploaded every minute." On other categories moving to YouTube: "In the political vertical, we have clients in Federal and local government who love to use our products. We have a political sales team and expect to see more of this."

On this quarter's capital expenditure: "We focus our hiring in our tech payroll," Pichette said. "As we bring on people, we focus on the areas that make a fundamental difference to Google, and this skews to engineering and R&D. This isn't a new run rate for us or anything, it's that most of these college students end up landing here in Q3."

The state of Google Play: "Google Play's doing great," Kordestani said. "We have great partnerships with many carriers that fuels this, and we're including carrier billing. All of this fuels the ecosystem."