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Google Profit Misses Estimates on Slower Growth

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Google Inc. (GOOGL) missed profit and revenue estimates for the third quarter as the search provider stepped up spending to reignite slowing advertising sales.

Profit, excluding some items, was $6.35 a share, the company said in a statement yesterday, falling short of analysts’ average projection for $6.53. Revenue, excluding sales passed on to partners, was $13.2 billion, just below analysts’ prediction, according to estimates compiled by Bloomberg.

Chief Executive Officer Larry Page, looking for new opportunities beyond desktop-based search ads, is ramping up investments in everything from business software to mobile services. Revenue at Google’s own websites grew 20 percent, compared with 23 percent in the prior period. At the same time, the company ramped up hiring and boosted research and development spending by almost 50 percent.

“The trend lines are OK, but you are slowing — growth certainly is slowing,” said Ben Schachter, an analyst at Macquarie Securities USA Inc. “They’re spending a lot to get the talent that they have. What needs to happen is you need to start to seeing some of the non-traditional areas contribute more to Google results.”

The shares of Mountain View, California-based Google fell 2.5 percent in extended trading. The stock declined less than 1 percent to $536.92 at yesterday’s close in New York, leaving it down 4.3 percent this year.

In German trading today, the shares fell to the equivalent of $524.68 as of 9:17 a.m. in Frankfurt.

Mobile Ads

Third-quarter net income fell 5.4 percent to $2.81 billion, or $4.09 a share, which included charges related to the sale of Motorola Mobility to Lenovo Group Ltd., from $2.97 billion, or $4.38, a year earlier. Operating expenses made up 37 percent of revenue, up from 33 percent a year earlier, Google said.

Although Google is seeking to expand the number of places where it can place ads, that hasn’t been enough to make up for slower growth at its main search websites.

“There’s always that concern — that core is going to slow,” said Colin Gillis, an analyst at BGC Partners LP in New York.

As more people use smartphones to check e-mail, manage their finances and access Web services, a third of search-based ad spending is now on tablets and mobile phones, up from less than 20 percent a year ago, according to IgnitionOne. Since ads on smartphones cost less, total mobile-ad prices in the U.S. declined 9 percent during the third quarter, while desktop ad prices fell 1 percent, the digital-marketing services company said.

Trade Off

The number of clicks on ads was up about 17 percent, a slowdown from the prior period. While the price of ads fell 2 percent, that was a slower declined compared with the prior quarter’s 6 percent drop.

“They can fluctuate from quarter to quarter,” Patrick Pichette, Google’s chief financial officer, said on a conference call. “It just happens that we made some changes this quarter that improved the mobile pricing while impacting the lower-quality clicks.”

While Google remains the largest destination for advertisements on the Internet, its audience is steadily migrating to smartphones, where the company gets less money for marketing spots than on desktops and tablets. Prices are also falling as Google expands outside the U.S., where advertisers spend less money on marketing via the Web.

“The problem is they get more traffic coming from Indonesia and Turkey and places where there’s not as developed an ad market, so pricing is lower,” said Martin Pyykkonen, an analyst at Rosenblatt Securities Inc. in New York. “Countries like that are mostly mobile traffic, so it just suppresses the number.”

More Features

Google is bolstering its services to attract more marketers. Last month, the company unveiled tools that automatically resize ad spots for desktop computers to fit mobile devices. In August, the company extended a mobile-advertising feature that shows what products are available nearby when users search for items.

Page is also stepping up acquisitions. The company more than tripled spending on deals in the first half to $4.2 billion, including $3.2 billion for thermostat company Nest Labs Inc. Google also announced acquisitions of more than $1 billion for home-camera company DropCam Inc. and satellite service Skybox Imaging Inc.

Google also added about 3,000 employees in the third quarter, many in technical positions. The company is spending on initiatives that include business software, hardware and its mobile marketplace on Android devices, Pichette said.

“We’re investing, and we’re investing with enthusiasm,” the CFO said.

(Source: Bloomberg)