SAN FRANCISCO - Google views the computing shift to smartphones and tablets as a golden opportunity, but the Internet search leader's second-quarter performance served as an unsettling reminder that it poses a nagging financial challenge, too.
The report released Thursday showed Google's average ad rate fell from the previous year for the seventh consecutive quarter. In an unexpected turn, the decline deepened for the first time in a year.
The average ad rate, or "cost per click," fell 6 percent during the three months ending in June. The magnitude of the declines had eased in each of the previous three quarters, raising hopes that the worse was over. Instead, things deteriorated from the 4 percent decline in ad rates during the first three months of the year.
The regression undercut Google's earnings and revenue. Both fell below analyst forecasts, spooking some investors. Google's shares fell $37.18, or 4 percent, to $873.50 in extended trading after the results came out.
Other unwelcomed developments also loomed over the quarter.
Excluding the costs of stock given to employees, Google's operating expenses climbed 27 percent from last year to $4.25 billion. That increase renewed concerns that Google is pouring too much money on far-flung projects, such as the development of driverless cars and balloons equipped with Internet-beaming antennas, instead of focusing on its main business of Internet search and advertising.
Motorola Mobility, a slumping cellphone maker that Google bought for $12.4 billion 14 months ago, also remains a headache. The subsidiary lost $342 million in the latest quarter, widening from $199 million a year earlier, when Google owned Motorola for only part of the reporting period. Motorola now has lost a total of $1.7 billion under Google's ownership, despite layoffs and divestitures that have whittled Motorola's workforce to 4,600 people, down from 20,300 at the same time last year.
Although he wouldn't forecast when Motorola might start making money, Google CEO Larry Page told analysts on a Thursday conference call that he is excited about the upcoming release of a new phone called Moto X. Page provided no further details about the phone, which he and other Google employees have been testing.
If Google backs the Moto X with an expensive marketing blitz, it would drive up the company's expenses again later this year.
Mobile ads, though, were the biggest issue on investors' minds.
Although the problem isn't as severe as at other companies, including computer makers such as Dell Inc. and Hewlett-Packard Co., Google is still having trouble navigating a technological transition driving more online activity on to smartphones and tablets. Those devices pose a financial challenge for Google Inc. because their smaller screen sizes fetch lower ad rates than the marketing pitches made on traditional desktop and laptop computers.
Google is in a far better position to prosper from mobile computing because it makes Android, the most widely used operating system on smartphones. The software also is gaining traction on tablets challenging Apple's pace-setting iPad. Google is expected to unveil the next generation of its Nexus tablets running on Android next week.
Android typically features Google's search engine and other services, such as maps and Gmail, giving the Mountain View, Calif., company more opportunities to show ads.
Now, Google is taking steps to persuade advertisers to pay higher prices to connect with consumers on mobile devices at times when they appear to be mulling a purchase or may be in a merchant's neighborhood.
Google is trying to drive up prices more quickly by changing the way it sells ads to prod more marketers into buying spots on mobile devices at the same time they plan campaigns aimed at PCs. About 6 million advertisers have already switched to Google's new pricing system. All marketers will be forced to adopt the new approach, known as "enhanced campaigns," by the end of the month.
In Thursday's conference call, Page described the switch to enhanced campaigns as the biggest change that Google has ever made to an online advertising platform launched more than a decade ago.
"I think we're still in the very, very early stages of that," Page said. "We changed a tremendous amount for how our teams operate, how our advertisers operate, how everyone buys those ads, what the users see, and we've done it pretty well."
Wedbush Securities analyst Shyam Patil said he believes Google is headed in the right direction in mobile advertising, despite the second-quarter slip in price.
"They are going to come up with the right solution, although now I am not sure if it is going to happen this year," he said. Patil also said he expects Google's stock to rebound quickly because too many investors believe the company's remains among the best bets in technology.
Google earned $3.2 billion, or $9.54 per share, in the second quarter up 16 percent from $2.8 billion, or $8.42 per share, a year earlier.
If not for the costs of employee stock compensation and charges tied to Motorola, Google said it would have earned $9.56 per share. That missed the average target of $10.80 per share among analysts surveyed by FactSet.
Revenue rose 19 percent to $14.1 billion, from $11.8 billion.
After subtracting Google's ad commissions, revenue stood at $11.1 billion - about $275 million below analyst projections.