Google misses estimates in third quarter, announces new business chief

A day after the search giant unveiled its latest Nexus tablets, smartphones and a streaming device, Google announces financial results for the third quarter.

Richard Nieva Former senior reporter
Richard Nieva was a senior reporter for CNET News, focusing on Google and Yahoo. He previously worked for PandoDaily and Fortune Magazine, and his writing has appeared in The New York Times, on CNNMoney.com and on CJR.org.
Richard Nieva
4 min read

The European Union has been scrutinizing Google's business practices when it comes to competitors. Justin Sullivan, Getty Images

Google's advertising machine rolls on, but not without its sputters.

The world's largest search engine on Thursday said sales rose 20 percent to $16.52 billion in the third quarter ended September 30. Profit, minus some costs, was $6.35 a share. Analysts were expecting sales of $16.59 billion and profit of $6.54 a share.

On a conference call with analysts to discuss the results, the company announced Omid Kordestani, the company's former chief business officer, had returned to the role. The company's last business chief, Nikesh Arora, announced in July that he was leaving Google for the Japanese telecom firm SoftBank.

"I'm thrilled to be back at my old job," said Kordestani, on the call.

Google, which makes most of its money from ads, is the leader in digital advertising revenue in the United States, with 38.3 percent market share, according to eMarketer. Though that's slightly down from last year's 39.7 percent share, Google still has a sizable lead. By comparison, No. 2 ranked Facebook has a 9.7 percent. But as the online ad industry shifts to devices like smartphones and tablets, Google gets less for mobile advertising.

In the third quarter, excluding the expense that Google pays partners to drive traffic to its properties (known as TAC), revenue was $13.17 billion.

Google doesn't break out revenue specifically related to mobile. But the growth of paid clicks -- an important metric for Google because it gets money every time someone clicks on an ad the company has placed -- has slowed. The metric grew 17 percent since last year, and two percent from the second quarter. Cost-per-click, the amount of money that Google gets each time you click on its ads, continued its downward trend, falling 2 percent year over year, but remained constant from the second quarter of 2014.

Google's shares are down almost 3 percent in after-hours trading.

The company's earnings report comes as Google's rivalry with Amazon, the e-commerce giant, heats up. Google executive chairman Eric Schmidt said earlier this week that Amazon -- and not Google or Yahoo -- is Google's "biggest search competitor."

Google has doubled down on its attempt to show ads to online shoppers by upping its investment in Google Express, the search giant's e-commerce and delivery service and a rival to Amazon's Prime service. Earlier this week, Google announced a $95 yearly service, undercutting the $99 price of service. Google's shopping ads, or "product listing advertisements," are up 8 percent from last year, according to the research firm The Search Agency.

"It's very clear people want this product," Patrick Pichette, Google's CFO, said on the call. "We're now in phase two of this product, according to our business plan."

While Google's dominance in search and advertising is good for its bottom line, it's led to increased antitrust scrutiny overseas. The company is embroiled in a 4-year-old investigation by European regulators over the way it displays search results. The probe centers on whether Google favors its own services -- like Google+ or YouTube -- over the results of competitors like Yelp or TripAdvisor.

Google's settlement proposals with the European Commission -- they've made three attempts so far -- have come under fire. Opponents include European politicians, competitors like Microsoft, and French and German publishers who say the response has been too lax. In September, EU Competition Commissioner Joaquin Almunia -- who leaves his post at the end of the month -- told Google that if the commission wasn't satisfied with its next settlement proposal, the company could face formal charges. That includes the possibility of a $6 billion fine, or 10 percent of the company's annual global sales.

It's not only Google's core search and advertising business that have rattled regulators in Europe. The EC is also investigating the company's business practices related to Google's Android, the most widely-used mobile operating system in the world. The Commission is looking into concerns from competitors that the company unfairly promotes its own apps, like search and maps, when hardware vendors run Android on their handsets.

"We welcome scrutiny on this," Sundar Pichai, Google's head of Android, told the Wall Street Journal on Wednesday. "We require Google services, but don't forget from a user experience standpoint we have to make sure that when you pick up a phone people can do things with it."

On Thursday, the company unveiled new Nexus devices -- products where Google partners with outside hardware vendors like HTC or Motorola, but leads the development in an attempt to showcase Android in its "purest" form. That is, with the technical specs and user interface of the software left unmodified by the hardware manufacturers.

Google introduced the Nexus 9 tablet, Nexus 6 large-screened smartphone and the Nexus Player, a streaming video device that runs a version of Android tailor-made for television sets. The new devices, to be available in the next month, will run the newest version of Android, called Lollipop.