Google Inc's quarterly results fell well short of Wall Street's expectations after its core advertising business slowed, stunning investors accustomed to consistently rapid growth from the Internet giant and wiping more than 9 percent off its market value.
The disappointing numbers on Thursday came hours ahead of schedule in a rare instance of premature filing. Google blamed the misfire on an unauthorized filing by its financial printers, RR Donnelley & Sons Co, and later confirmed the numbers' accuracy.
The earnings report, which had not been expected until after the market close, revealed a weakening in Google's core Internet advertising business and persistent losses at its recently acquired cellphone business, Motorola Mobility.
Shares of Google, the world's No. 1 Internet search engine, finished Thursday's regular trading session down 8 percent at $695 after a brief trading halt. Some analysts said the inadvertent results release spurred confusion and exacerbated its stock price decline.
Google executives maintained in a conference call on Thursday that the company's various businesses continued to benefit from healthy growth and that Google was well-positioned to capitalize on consumer's increasing use of mobile devices.
Chief Executive Larry Page, speaking on his first earnings call since an unspecified voice ailment sidelined him from public speaking in June, said that Google's mobile business was now generating revenue at an annualized run rate of $8 billion.
Page acknowledged that mobile ad rates were below the rates that Google garners for ads that appear on its standard website. But he said the variety of Web-connected devices used by consumers is creating "a huge new universe of opportunities for advertisers."
"We're uniquely positioned to get through that transition and to really profit from it," Page said, citing Google's Android mobile software, the world's top operating system for smartphones by market share.
Google, which has been struggling to turn around a Motorola Mobility hardware business it bought for $12.5 billion, reported a 20 percent dive in net income to $2.18 billion. Excluding certain items, it earned $9.03 a share, vastly underperforming the $10.65 analysts had expected, on average.
"We have been saying this thing was ripe for a pullback. It's not like they're Google not being Google, but you still have some major issues," said BCG analyst Colin Gillis.
"Click prices declined for the fourth consecutive quarter after rising for eight consecutive quarters before then. That's a negative. This is the mobile problem."
"The other bit is the Motorola millstone had been ignored by the market, and - boom - now you've got weak revenue from Motorola. When you acquire a business and you're about to whack all kinds of people and close offices, you know what happens to the employees? They take their eye off the ball. Sales are down," Gillis explained.
Net revenue growth at Google's main Internet business increased 17 percent year-over-year, the first time growth in that business has fallen below 20 percent since 2009. Google Finance Chief Patrick Pichette stressed on the conference call that the revenue growth rate was higher if the impact of foreign currency exchange rates was backed out.
"It was just too rapid a deceleration," said Pivotal Research Group analyst Brian Wieser. "Many of the same underlying trends drive Facebook advertising."
Shares of Facebook Inc
The decline in Google's shares come after a three-month run-up in its stock, which reached an all-time high of $774.38 earlier this month.
A BAD MISS?
Google reported net revenue - excluding traffic acquisition costs - of $11.3 billion for the third quarter, below Wall Street's expectations for about $11.9 billion.
For the fourth consecutive quarter, the company reported a decline in average cost-per-click (CPC), a critical metric that denotes the price advertisers pay Google.
Average CPC declined 15 percent from a year ago and 3 percent from the second quarter of this year. Analysts say that Google, like many of its peers in the Internet industry, has been struggling to adapt to the rapid consumer uptake in mobile devices. Advertisers pay far less for ads on smartphones and tablets than for similar ads on desktop computers.
"The core business seems to have slowed down pretty significantly, which is shocking," said B. Riley analyst Sameet Sinha. "The only conclusion I can look at is, search is happening more and more outside of Google, meaning people are searching more through apps than through Google search."
"That could indicate a secular change, especially when it comes to ecommerce searches. The big fear has always been, what if people decide just to go straight to Amazon and do their searches? And potentially that's what could be happening."
But Ryan Jacob, chairman and chief investment officer of Jacob Funds, said he viewed Google's results as only "minorly disappointing," with most of the weakness coming from Motorola as expected.
"Unfortunately, by dropping an 8K in the middle of a trading day, people kind of shoot first, ask questions later," said Jacob, whose fund owns Google shares.
JP Morgan analyst Doug Anmuth said in a note that the Google results were "light" but not as bad as they appeared at "first blush."
Google, which recently overtook Microsoft Corp
The second paragraph of the press release merely read "Pending Larry quote," suggesting that space was reserved for comment from CEO Larry Page.
"Earlier this morning RR Donnelley, the financial printer, informed us that they had filed our draft 8K earnings statement without authorization," Google said in a statement. "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 PM PT."
Shares of RR Donnelley, the U.S. printing services company, slid as much as 5 percent. They closed down 1 percent at $10.76.
Reed Kathrein, a plaintiff lawyer with Hagens Berman who sues companies on behalf of investors, said investors would not have a claim against either Google or RR Donnelley because the earnings disclosure was likely a mistake.
"There's no fraudulent intent here," Kathrein said.
However, Google could have a negligence claim against RR Donnelly to recover any additional costs it incurred in responding to the incident, Kathrein added.
"Everyone is trying to figure out if there's any legal issue with respect to RR Donnelley," said Michael Matousek, senior trader at U.S. Global Investors Inc, which manages about $3 billion in San Antonio.