The numbers: Google reported first quarter net income of $3.45 billion, slightly up on last year, but well shy of consensus estimates for $4.3 billion, according to FactSet. Revenue was $15.4 billion, up 19% on last year, but only $12.2 billion once commissions paid to partners for traffic were taken out. FactSet expectations were for revenue of $12.4 billion, after the partner commissions. With a miss on both profit and revenue, Google shares have sunk by about 6% in after-hours trade.
The takeaway: The average cost per click for advertisements (a measure of how much Google charges advertisers in its auction-based systems) fell by 9% during the quarter, while traffic acquisition costs—the amount it pays to partners for traffic (for example to Apple for default Google searches via the Safari browser on iPhones) rose to $3.23 billion compared to $2.96 billion a year ago. While Google has expanded aggressively in recent years into businesses as diverse as smartphone operating systems and self-driving cars, very profitable search advertising has remained the core of its business. The latest earnings show the prices it can command there dropping and its costs to bring in that search ad revenue rising, which could prove challenging if extended over time.
What’s interesting: “We got lots of product improvements done, especially on mobile,” Google CEO Larry Page said in the earnings press release. Investors are wondering whether Google’s search business will be as much of a juggernaut amid the transition away from PCs to mobile devices. But the only mentions of mobile in the earnings release thereafter were about the accounting treatment for Motorola Mobile, the handset business which Google sold to Lenovo in January.