Oh Google, What Happened?

The Flash Crash breeds uncertainty.Google (NASDAQ:GOOG) was full of surprises on Thursday, falling short of Wall Street’s expectations after growth in its core advertising business slowed. Shares tumbled more than 9 percent after earnings came out hours ahead of schedule in a rare premature filing, forcing the search giant to briefly halt trading. Google blamed the misfire on an unauthorized filing by financial printers RR Donnelley & Sons Co. (NASDAQ:RRD), but later confirmed that the numbers were, unfortunately, accurate.

The earnings report, which hadn’t been expected until after market close, revealed an unexpected weakening in Google’s core Internet advertising business, as well as continuing losses at the recently-acquired Motorola Mobility. Shares closed the day down 8 percent to $695.

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In a conference call Thursday, Google executives maintained that the company’s various businesses continued to benefit from healthy growth, and that the company was well-positioned to capitalize on consumers’ increasing use of mobile devices. CEO Larry Page said that Google’s mobile business was now generating revenue at an annualized run rate of $8 billion.

Mobile ad rates for the quarter were below what Google garners for ads appearing on its standard website, but Page said the variety of Internet-connected devices used by customers is creating “a huge new universe of opportunities for advertisers” and that Google is “uniquely positioned” to make the transition to mobile, and to “really profit from it,” citing the company’s popular Android mobile software, which powers more smartphones around the world than any other operating system.

However, Motorola Mobility appears to be dragging Google down. The search company acquired the cell phone maker last year for $12.5 billion, and in the recent quarter, net income dropped 20 percent to $2.18 billion. Excluding items, Google earned $9.03 a share, well below the $10.65 expected by analysts.

Motorola isn’t the only one to blame here, though, as click prices have also been declining, taking a bite out of Google’s advertising revenue. According to BCG analyst Colin Gillis, click prices declined for the fourth consecutive quarter after having risen for eight consecutive quarters before that. Net revenue at Google’s main Internet business increased 17 percent year-over-year, falling below 20 percent for the first time since 2009.

Analysts and investors have worried that Internet stalwarts like Google may struggle with the transition to mobile. The earnings miss, as well as the shocking nature in which it was reported, gave credence to some of those fears, perhaps resulting in a bigger sell-off than was warranted — traders reacted first, asked questions later.

That’s not to say that the earnings miss wasn’t a big one. Net revenue, excluding traffic acquisition costs, was $11.3 billion in the third quarter, well below Wall Street’s expectations for about $11.9 billion. And the company reported a decline in average cost-per-click, a metric that denotes the prices advertisers pay Google, for the fourth consecutive quarter. CPC is now down 15 percent from a year ago.

Companies pay less for mobile ads, and Google doesn’t have quite the hold on that form that it does on PCs. A lot of search is now done directly through apps. And when it comes to e-commerce searches, sites like Amazon.com (NASDAQ:AMZN) are becoming so ubiquitous that people are now typing the URL directly into their browsers and doing their product searches within that site rather than beginning their searches on Google.

Still, most of the weakness came from Motorola, as expected. And the weight — the burden — of that acquisition has prevented investors from looking at the bigger picture. With its Motorola purchase, Google acquired a sizeable portfolio of mobile patents. The purchase only gained approval in the U.S. in February, and in China in May. What will come of it has yet to be seen, but rest assured Google will make use of those patents and the company’s experience in hardware to build up Android and its mobile services.

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