Google earnings leak early, fall way short, and stock plunges

Google's stock gives up much of its recent gains after the company reports profits fell 20 percent while costs rose.

Casey Newton Former Senior Writer
Casey Newton writes about Google for CNET, which he joined in 2012 after covering technology for the San Francisco Chronicle. He is really quite tall.
Casey Newton
4 min read
Google CEO Larry Page is expected to speak on a conference call later today about Google's earnings miss.
Google CEO Larry Page is expected to speak on a conference call later today about Google's earnings miss. CNET

Google stock plunged about 9 percent after the search-engine giant unexpectedly released its earnings report midday Thursday. The company posted earnings of $9.03 a share on revenue of $11.5 billion, missing expectations for $10.65 a share on sales of $11.86 billion. The company was scheduled to post after the closing bell.

Trading of the stock was halted after the midday release of Google's third-quarter earnings, which was inadvertent. One section of the report contains a place for a "pending Larry quote, referring to Google CEO Larry Page. Google blamed the inadvertent early release on its financial printer, R.R. Donnelley, and said it would re-file its earnings later today.

"Earlier this morning RR Donnelley, the financial printer, informed us that they had filed our draft 8K earnings statement without authorization," a Google spokesperson told CNET in an e-mail. "We have ceased trading on NASDAQ while we work to finalize the document. Once it's finalized we will release our earnings, resume trading on NASDAQ, and hold our earnings call as normal at 1:30 Pacific Time."

Google later officially released earnings, complete with Page's quote: "We had a strong quarter. Revenue was up 45 percent year-on-year, and, at just fourteen years old, we cleared our first $14 billion revenue quarter. I am also really excited about the progress we're making creating a beautifully simple, intuitive Google experience across all devices."

Page is expected to be on the earnings conference call Google has scheduled for 1:30 p.m. PT. CNET will be covering the call. (Click here for live blog.) The Twittersphere wasted no time with this mishap as someone launched @pendinglarry

Google earned $2.18 billion in the quarter, down 20 percent from the comparable quarter last year. Part of the blame falls to Motorola Mobility, which continues to struggle The unit, which Google acquired last year for $12.5 billion, generated a loss of $151 million.

More troubling, though, was that cost-per-clicks -- what advertisers pay Google each time a user clicks an ad -- fell 15 percent on the year. Meanwhile, traffic acquisition costs -- what Google pays to affiliates and other sites to drive users to its sites -- increased 25 percent, to 2.77 billion.

While profits fell, the company posted strong revenue growth. The company's consolidated revenue, which includes what Google spends to generate traffic, was $14.1 billion in the quarter, a 45 percent increase from last year.

Google's stock has been on a tear as of late, rising more than 30 percent this summer before hitting a record $774.38 earlier this month. That prompted a host of analysts to raise their price targets for the stock, led by Citi's Mark Mahaney, who issued a bullish report saying the stock could hit $850.

The stock has appreciated thanks to strong growth in spending on search advertisements, the introduction of paid product listings inside Google Product Search, and streamlined operations at Google-owned Motorola Mobility. The company has eliminated 4,000 jobs at Motorola, closed a third of its 94 offices worldwide, and is rumored to be exploring the sale of Motorola Home, which makes set-top cable boxes, for up to $3 billion.

The question is whether Google stock, which has been a middling performer in past years, can continue to reach new highs.

On the mobile front, the company faces questions about whether its Android software will become a significantly larger portion of Google's revenues. The company has said it expects to generate $2.5 billion from Android this year -- a small fraction of its overall revenues, particularly given that it is the most-used mobile operating system on Earth. An analysis by Horace Dediu at Asymco projected that Google would generate only 2.5 percent of the revenue of Apple's iPhone this year.

More pressingly, Google faces significant pressure from regulators on antitrust and privacy issues. Reuters reported last week that a majority of commissioners at the U.S. Federal Trade Commission favored bringing an antitrust lawsuit against Google, likely based on charges that the company's search algorithms feature its own results more prominently than those of its rivals.

While regulators appear unlikely to require dramatic changes at Google, the heightened scrutiny and soaring legal bills could distract the company's executive leadership, analysts say.

Meanwhile, data-privacy watchdogs representing the European Union this week ordered Google to amend its privacy policies or risk fines or other legal action. France's Commission Nationale de l'Informatique, representing the EU's 27 national data regulators, made 12 recommendations to Google to bring its policies in line with European law. (Google, for its part, said its policies already comply with the law.)

This post was updated at 12:14 p.m. PT with an official quote from Larry Page.

Google Earnings Slides, Q3 2012