Why Google missed: Bellwether slip sends chill through industry

When an industry bellwether reports worse-than-expected earnings, everyone wants to know why. When that bellwether is Google, and the why is a toxic combination of shifting platform patterns and soft cost per click (CPC) performance, the industry may wish it hadn't asked the question in the first place.

Google surprised analysts last week by missing estimates for its just-completed quarter. A posting error by its publisher caused the results to go live hours before they were supposed to: an embarrassing turn of events, but hardly fatal. Far more worrisome was Google's online advertising performance.

Softening performance

Although volumes were up — paid clicks soared 33 per cent compared to the year-ago quarter, and revenues spiked 45 per cent - net income was down 20 per cent to US$2.18 billion, well below guidance. Net revenue grew 17 per cent year-over-year, the first time in three years that it was below 20 per cent. Worse, the all-important CPC numbers were down 15 per cent over the same period last year. With traffic shifting from conventional PCs that were long Google's bread and butter to mobile devices, the company is having difficulty maintaining margin.

On Thursday, the stock shed 9 per cent of its value after the premature release before the NASDAQ halted trading of Google shares. Investors worry that if Google, the standard of the world in converting online traffic to revenue, shows weakness, it casts a long shadow over the entire industry. Indeed, Google is hardly the only company encountering turbulence these days as stalwarts with strong PC or conventional web legacies grapple with changing fundamentals:

• Intel's share value dropped 2.5 per cent on Wednesday after it released disappointing quarterly results, thanks largely due to an unexpected drop in demand for data center equipment.

• Microsoft revenues were off 8 per cent to $16 billion and net profit fell 22 per cent to $4.47 billion year-over-year as consumers and businesses delayed upgrade plans before planned launches for Windows 8 and Office 2013.

• AMD revenue sank 10 per cent sequentially and 25 per cent year-over-year as the company recorded a $157 million net loss and prepared another round of job cuts amid sluggish demand for PCs.

The grey clouds surrounding blue chip players is dragging down the broader futures markets, with the Dow, NASDAQ and S&P 500 indexes all responding negatively to the spate of gloomy reports.

The weakness extends to onetime social media darlings, as well. Facebook is attempting to convince investors it can build a mobile-friendly advertising infrastructure capable of driving long-term growth. Its languishing share price since its May IPO strongly suggests the pieces aren't yet in place. Zynga, the online game vendor whose IPO last year fuelled speculation that Facebook, where most of its games are hosted, was a one-way rocket ride, has become the symbol of the mobile economy's perils. It's lost three-quarters of its share value this year after failing to follow up massive conventional-web hits like FarmVille and Mafia Wars with anything remotely successful in mobile.

Acquisition troubles, too

The mobile transition isn't the only thing weighing Google down — its Motorola Mobility unit, which it acquired last year for $12.5 billion, bled $527 million last quarter and shed thousands of jobs. As Google ramps up its plans to market Nexus-branded smartphones and tablets, Motorola oddly finds itself needing to compete with external vendors like LG and Asus for the affections of its parent company.

Google's long-term health depends on its ability to transition its business model from its conventional web roots to the somewhat daunting realities of the mobile web. Its most recent financial results confirm that it hasn't yet cracked the code. Until Google figures it out, every other tech player with even a tertiary interest in mobile advertising remains similarly vulnerable. Expect investors to remain skittish until Google regains mobile traction.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. carmilevy@yahoo.ca