Google’s second-quarter results have fallen short of Wall Street's estimates as weakening prices for the company’s ads and widening losses from its Motorola mobile phone business weighed on the bottom line.
The falling ad prices surprised analysts and investors, who expected changes to the company's advertising system to help mitigate the effects of a shift to mobile advertising.
Google's consolidated revenue, which includes results from its Motorola mobile phone business, was $14.11 billion in the second quarter, versus $11.81 billion in the year-ago period.
Analysts, on average, expected $14.4 billion, according to Thomson Reuters.
Revenue for its core business rose 20% to $13.11 billion. Excluding items, Google earned $9.56 per share, lower than the $10.78 expected by analysts.
Google shares, which had risen to all-time highs in recent weeks, slid roughly 4% to $872.80 in after-hours trading, having earlier closed at $910.68 on the Nasdaq.
Google's business, like those of rivals Facebook and Yahoo, has been under pressure as more consumers access its online services on mobile devices such as smartphones and tablets, where advertising rates are lower than on PCs.
Earlier this year, Google changed the way marketers run ad campaigns on Google, blurring the distinction between ads destined for PCs and mobile ads, in a move that some analysts believed could help bolster Google's overall ad prices.
That did not happen in the second quarter.
"We've got to assume that maybe Enhanced Campaigns is not going to provide the pricing boost that a lot of people were expecting," said JMP Securities analyst Ronald Josey, referring to a new ad policy program unveiled by Google in February.
The average price of Google's online ads slid a larger-than-expected 6% year-on-year in the second quarter, compared with the first quarter's 4% decrease.
One problem may be that consumers do not click on mobile ads as often as they do on desktop PCs, said BGC Partners analyst Colin Gillis.
"So even if you force advertisers to buy them, if the conversion rates drop, (advertisers are) going to pay less for clicks," he said. "The reality is that Enhanced Campaigns may serve to drag down overall click pricing."
Patrick Pichette, Google's finance chief, cited a variety of reasons for the decline in ad prices during a conference call with analysts, including a growing portion of ads in international markets with lower rates, as well as the shift to mobile.
He stressed that Google's overall volume of ads increased by 23%, accelerating from the first quarter's 20% gain.
Google Chief Executive Larry Page said new businesses - such as a streaming music subscription service - were off to a strong start, and noted that more than 1.5 million mobile devices that are sold every day feature Google's Android software.
The company has also been investing heavily in hardware devices, notably in its loss-making Motorola division, which is soon expected to finally unveil a signature phone - the so-called Moto X.
But Motorola's widening losses took a toll on Google's profit margins, adding further concerns on Wall Street.
Operating margins dipped to a lower-than-expected 28% in the quarter from 33% a year earlier.
Motorola, acquired by Google in 2012, racked up a loss of $218 million before items, more than four times the $49 million it lost a year earlier.
"Google outsourced the Motorola manufacturing and sold the home business, so I would have expected Motorola’s margin to be higher," said Kerry Rice, an analyst at Needham & Co.
