Google earnings fail to meet expectations as expenses soar

Investors in Google were feeling a little underwhelmed by the company’s third quarter earnings with the shares down about 1% to $524 in pre market trading.

Sales revenue fell marginally short of estimates and profits came in light as expenses increased. Forecasts of $16.57 billion revenues were not met with the number coming in at $16.52 billion as the amount paid for clicks slowed down. Revenue from Google’s sites including its core search business and YouTube were up 20% to $11.25 billion and network business on partner sites rose 9% to $3.43 billion. Earnings came in at $2.81 billion, or $4.09 a share, down from $2.97 billion, or $4.38 a share, in the same period in 2013. Excluding stock-based compensation and other expenses, Google earned $6.35 a share compared with expectations of $6.53, but up from $5.63 a year earlier.

Earnings were hit by increased operating costs mainly due to an increase in hiring which increased by 3,000 in the quarter to 55,000 and a hike in capital expenditure to $2.42 billion in the quarter which was used for building data centres and acquiring land.

Paid clicks on Google’s main search engine rose 17% year on year, compared with 26% and 25% growth in the previous two quarters. But the cost per click dropped 2% in the third quarter, compared to a 6% and 9% fall in the prior quarters indicating that the company is being somewhat successful in mitigating the impact of Google users migrating from desktops to mobile. Advertisers are less willing to pay high cost per clicks in the mobile environment given the more limited scope for advertising solutions due to the small screen size. Google’s chief business officer, Omed Kordestani, said that “As it happens we have made some changes this quarter which change our mobile pricing, whilst getting rid of some low-quality clicks. It is constantly fluctuating. What is really important is the combined volume and pricing growth. Quarter to quarter, don’t worry about little fluctuations here and there.”

Google is certainly not afraid to continue pouring resources into R&D, people and infrastructure to stay ahead of the game and with 17% growth in search engine clicks isn’t too shabby. Its certainly getting a little tougher to keep growing the business at the break neck speed of prior years, but it looks like the company, like Facebook, is contending pretty well with the shift away from desktop PCs and trying to embrace the use of the internet on mobile devices.

Contrarian Investor UK

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