Google's parent company Alphabet has missed Wall Street targets for first-quarter profit and revenue, as it spent more money to build traffic for its mobile advertising services.
The results, which were also hit by the strong dollar, drove shares of the internet search company down 6% in late trading yesterday.
Alphabet's consolidated revenue rose to $20.26bn (€17.93bn) from $17.26bn (€15.28bn), slightly below the $20.37bn (€18.03bn) analyst consensus, according to Thomson Reuters.
Non-GAAP earnings per share of $7.50, excluding one-time items, missed analysts' expectations of $7.97.
Chief Financial Officer Ruth Porat said on a conference call with investors that payments to other web sites, known as traffic acquisition costs (TAC), totalled $3.8bn and accounted for 21% of advertising revenues.
The percentage of ad revenues spent on TAC grew 13% year-over-year.
That reflects the ongoing shift to mobile advertising and the growing importance of programmatic advertising, in which ads are bought, sold and displayed by automated systems.
Investors should get used to seeing increased TAC as "the cost of doing business," said Sameet Sinha, B Riley & Co analyst.
"If you're getting mobile searches from Apple devices you have to pay Apple for traffic so that revenue can happen," Mr Sinha said.
"The same thing on the programmatic side, when you end up representing more people and selling their ad space or buying their ad space, you have to pay somebody else."
Mr Porat said spending on traffic acquisition is expected to keep rising as the shift to mobile continues - pressuring the company's traditionally robust margins on its advertising business.
"I think investors expecting stable margins are probably being overly optimistic.
But that said you can have diminishing margins and still have a great business and an incredibly lucrative one," said Pivotal Research Group analyst Brian Wieser.
Google's advertising revenue increased 16.2% to$18.02 billion, while the number of ads, or paid clicks, rose 29%, the company said.
Losses increased at the company's Other Bets business, which includes its broadband business Google Fiber, home automation products Nest, self-driving cars and X - the research division that works on "moon shot" ventures.
The loss widened to $802m, up from $633m a year earlier. Revenue rose to $166m from $80m.
Compared to Google's overall business, Mr Wieser said losses in other bets were "too small to matter" at the moment.
"If you're an optimist you can look to [other bets] and say it can eventually support long term growth."
Mr Porat said foreign exchange rates factored heavily into the results, shaving $762m from its revenue for the quarter or $593m after the effects of a currency hedging programme.
"Our total revenue grew 23% year-over-year and declined 4% sequentially, reflecting holiday seasonality," she said on the conference call.
Martin Pyykkonen, an analyst at Rosenblatt Securities, said the effect of foreign currency was worse for Alphabet than expected.
"If there had been a little better foreign currency translation, it would have been better than the Street consensus," he said.
Alphabet's total net income rose to $4.21bn, or $6.02 per Class A and B share and Class C capital stock, from $3.52bn, or $5.10 per share.
The company's shares fell to $732.94 in after hours’ trade from a close of $780.
