Google Reports Disappointing Revenue--3rd Update

By Rolfe Winkler And Alistair Barr 

The rising dollar claimed another victim as Google Inc.'s revenue grew slower than expected.

The Mountain View, Calif., Internet giant said fourth-quarter revenue, excluding payments to other companies that syndicate its ads, rose 17% to $14.5 billion from $12.4 billion in the year-ago period. Analysts polled by FactSet had projected revenue on that basis of $14.7 billion.

Net income rose 41% to $4.8 billion, or $6.91 per share, from $3.4 billion, or $4.95 per share. Excluding certain expenses like stock compensation, Google reported earnings per share of $6.88. Analysts had expected $7.12 on that basis, according to FactSet.

Despite the weak revenue figure, Google shares rose nearly 2% in after-hours trading. The move may reflect the long slide in Google's shares, which are down 9% over the past year, while the Nasdaq index rose 13%.

Google's Chief Financial Officer Patrick Pichette told investors on a conference call that the strong dollar reduced revenue by more than $400 million, after taking account of currency hedges. Absent the impact of the dollar, revenue would have risen roughly 20%.

Google's growth has been slowing as search queries stall on personal computers, where Google makes more money from clicks on ads. Ads on mobile devices historically have been a liability, but Mr. Pichette said "strength in our mobile search" boosted revenue. Google doesn't break out revenue from mobile devices.

Advertising revenue that Google generates from its own websites, including its search engine and YouTube, increased 18% in the fourth quarter, compared with the prior year.

Google said the number of paid clicks rose about 14%, compared with the same period a year earlier. Analysts at RBC Capital Markets were expecting a 15% increase. The average cost per click, which measures what advertisers pay when people click on Google ads, fell 3% in the fourth quarter, versus the same year-ago period. RBC analysts were looking for a decline of 1%.

But "other" revenue, which includes the Google Play store for apps, slowed surprisingly. Other revenue grew 19%, after growing 50% in the third quarter, compared with a year earlier. Besides the strong dollar, Mr. Pichette cited a shortage of Google's popular new Nexus 6 smartphones as a reason for the lower growth.

Google's profitability is taking a hit as operating expenses grow faster than revenue. Operating profit margin was 24% in the fourth quarter, a slight improvement from the third quarter, but down from 28% in the fourth quarter of 2013. Google added roughly 5,000 employees over the past six months, to 53,600.

Research and development costs increased 45% to $2.8 billion. Google also spent $3.6 billion on capital expenditures in the quarter, a record for the company, as it buys more real estate and invests in more data centers to support future growth.

"The real issue is that Google continues to ramp up expenses," said Ben Schachter, an analyst at Macquarie Securities. "All the large Internet companies are investing for the long term and hiring a lot of people, which spooks investors."

Net income grew faster than revenue because Google posted a $740 million gain from the sale of its Motorola handset to Lenovo Group Ltd. A year earlier, the unit had posted a loss of $506 million.

With $64.4 billion of cash at the end of the quarter, Google could face more pressure from Wall Street to return cash to shareholders via share buybacks or a dividend. Asked by an analyst whether Google would consider such moves, Mr. Pichette said the company regularly reviews all options for its cash but had nothing to announce.

There is concern that Google's revenue could take another hit if the company were to lose its perch as the default search engine for Apple Inc.'s Safari browser, the way most iPhone users access the Internet. Google lost a similar deal to be the default search engine for the Mozilla Corp.'s Firefox Web browser this past quarter. Mr. Pichette declined to comment about the Safari deal on the conference call.

Write to Tess Stynes at [e-mail]

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