SAN FRANCISCO – 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.
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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, R.R. Donnelley, 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, were down 9 percent at $690.84 after a brief trading halt. Some analysts said the inadvertent results release spurred confusion and exacerbated its stock price decline.
But other analysts were unnerved by softness in the numbers. 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.
The slowdown in revenue growth came on the back of falling advertising rates as users shift increasingly to mobile devices, where it charges less than it can on computers or laptops.
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"It was just too rapid a deceleration," said Pivotal Research Group analyst Brian Wieser. "Many of the same underlying trends drive Facebook advertising."
Shares in Facebook Inc, which headed south shortly after Google's inadvertent filing, were down 4.6 percent. Google's snafu recalled Facebook's debut, which was marred by technical glitches that also spooked traders and contributed to the stock's first-day decline.
On Thursday, 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.
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 adds 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 to become the second-largest U.S. technology company by capitalization, had been due to release its results after the market close.
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 were down 2.2 percent at $10.61 in afternoon trade.
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 R.R. 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 R.R. 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. (Additional reporting by Gerry Shih and Noel Randewich in San Francisco, David Gaffen and Jennifer Saba in New York; Editing by Bernard Orr, Gary Hill)