Good news for on-line advertisers

Google reports and misses expectations.

Hot on the heels of Microsoft miss, Google just reported Q2 results short of Wall Street’s estimates as weakening prices for ad Words and widening losses from its Motorola mobile phone business weighed on the bottom line.

The falling ad prices surprised analysts and investors, who expected recent changes to the web search company’s advertising system to help mitigate the effects of an industry-wide shift to mobile advertising.

Shares of Google, which had risen to all-time highs in recent weeks, slid 4 percent to $872.80 in after-hours trading on Thursday, having earlier closed at $910.68.

Google’s business, like those of rivals Facebook Inc and Yahoo Inc, has been under pressure as more consumers access its online services on mobile devices such as smartphones and tablets, where advertising rates and click through percentages 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.

This has yet to happen.

“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 percent year-on-year in the second quarter, compared with the first quarter’s 4 percent decrease.

One problem may be that consumers don’t click on mobile ads as often as they do on desktop PCs, said BGC Partners analyst Colin Gillis. – A blindly obvious quote from Colin. On small screen iPhone or Android, standard PC screen shaped ads just don’t work as the real estate is limited.

“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 on Thursday, including a growing portion of ads in international markets with lower rates, as well as the shift to mobile.

And he stressed that Google’s overall volume of ads increased by 23 percent, accelerating from the first quarter’s 20 percent gain.

Motorola still a drain

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 percent to $13.11 billion.

Excluding items, Google earned $9.56 per share, lower than the $10.78 expected by analysts.

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 percent in the quarter from 33 percent 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.

The good news here is that ad rates are down benefiting our Ad Words clients who continue to receive more for less.

Contact Taybridge to learn more about expanding your on-line advertising with Google Ad Words.