As Google Changes, Its Revenue Keeps Rising

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SAN FRANCISCO -- Google wants the world to know that it has grown into a new identity -- it is a mobile company now. The financial report it issued Thursday reflects the growing pains that have accompanied the transformation.

Advertising, Google's main business, does not always make as much money on phones as it does on computers, and the price that advertisers pay for clicks on Google ads has decreased 16 percent since last year. And Motorola Mobility, the mobile device maker that Google now owns, is losing money.

Still, Google continues to chug along in its vast search advertising business and make headway in newer businesses like display advertising. Its core business, not including Motorola, had net revenue of $8.36 billion, less than the $8.41 billion that analysts had expected but up 21 percent over last year. Google did not break out net income for the two businesses, but for the combined company it climbed 11 percent. Google shares were up 2 percent in after-hours trading.

Google's blossoming mobile strategy makes it even harder to differentiate among the big technology companies. Google, Apple, Microsoft and Amazon each have mobile devices, apps and cloud storage. And it is in those areas that the tech giants are competing.

In June, Google introduced the Nexus 7, a sleek seven-inch tablet to compete with the iPad, the Kindle and the Surface. It also showed the Nexus Q, for home entertainment; Internet-connected Google Glasses; and a new version of its Android mobile operating system, Jelly Bean.

The idea is to offer mobile devices so more people use Google services everywhere they go, instead of devices and services from competitors.

"All of the combatants in the intergalactic race for supremacy appear to be launching consumer products and hardware," said Jordan Rohan, an Internet analyst at Stifel Nicolaus. "Google's management team realizes that if consumers lock into the Apple ecosystem, it's going to be hard to sell them Android devices in the future."

But while Google is meeting people on the devices they want to use, analysts are closely watching whether it can make as much money on mobile devices as it has on desktop computers.

People have long described the price difference between print and Web ads as moving from analog dollars to digital dimes. Cellphone ads could be described as trading those dimes for mobile pennies. Clicks on mobile ads cost about 40 percent of the price of desktop ads, according to Stifel Nicolaus. That is because there is more inventory with the addition of mobile ads, and that could keep some Google users from seeing ads on computers. In addition, people are less likely to make purchases on their phones.

"The reality is when your click prices are going down, it means that advertisers are paying less for your inventory," said Colin W. Gillis, a technology analyst at BGC Financial.

Google executives said the decline in ad prices was mostly because of foreign exchange rates, that the mobile ad business was healthy and that mobile searches were not cannibalizing desktop searches.

"We believe that mobile searches are mostly incremental," said Susan Wojcicki, senior vice president for advertising. "For example, on weekends when users are out and about we see a rise in mobile activity and when users come back on Monday we see a rise on desktop."

Google dominates mobile advertising with 95 percent market share for search ads and 52 percent market share for all types of mobile ads, according to eMarketer. The number of paid clicks on Google ads increased 42 percent over last year.

In a statement, Larry Page, Google's chief executive, called it a "strong quarter" with "a bunch of exciting new products" and said that with the acquisition of Motorola, "we're excited about the potential to build great devices for users."

Mr. Page did not speak to analysts on the earnings conference call, however, because of an ailment that has left him unable to speak for weeks. Though analysts said his health is an ongoing risk, Google executives declined to offer details.

"Larry has lost his voice, and we said that means he cannot do any public speaking engagements at the time, including today's earnings call," said Nikesh Arora, Google's chief business officer. "But he's here and continues to run the company and is involved in any strategic decisions we're making."

Google reported second-quarter revenue of $12.21 billion, up 35 percent from $9.03 billion in the year-ago quarter. Net revenue, which excludes payments to ad partners, was $9.61 billion, up from $6.92 billion. Net income rose to $2.79 billion, or $8.42 a share, from $2.51 billion, or $7.68. Excluding the cost of stock options, Google's second-quarter profit was $10.12 a share, compared with $8.74 last year.

Analysts scrambled to make sense of Google's earnings report because for the first time it included Motorola, but not full quarterly results for the device maker because the acquisition closed May 22. Motorola lost $233 million on $1.25 billion in revenue during that period -- results that analysts called "frightening."

Patrick Pichette, Google's chief financial officer, asked investors to give Google time to do its homework on Motorola. The addition of Motorola's 20,293 employees nearly doubled Google's head count.

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This article originally appeared in The New York Times.


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