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Google and Microsoft earnings fall short of expectations

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SAN FRANCISCO — Google Inc., the world’s most valuable Internet company, and Microsoft Corp., the world’s largest software company, each disappointed investors with financial performances that fell short of Wall Street expectations.

In Google’s case, its second quarter showed the Mountain View, Calif., company was still wrestling with how to make as much money from selling ads on mobile devices as it does on desktop computers with consumers increasingly using smartphones and tablets.

The average ad rate or “cost per click” fell from the previous year for the seventh straight quarter. And though the declines had eased up in the previous three quarters to 4%, the average ad rate fell more deeply in the second quarter to 6%, spooking investors.

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“Google still has a massive mobile problem,” said Colin Gillis, an analyst at BGC Partners. “And the core business is slowing down.”

Google is tackling the challenge with a program called “enhanced campaigns,” which it introduced in February and will become mandatory for advertisers Monday. The program automatically includes desktop, tablet and smartphone ads for all advertising campaigns.

Nikesh Arora, the company’s chief business officer, said he expected that “enhanced campaigns” would have a positive impact “long term.”

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“It is an existential requirement for us to take our advertisers and move them to a campaign strategy, which allows us to move them across multiple screens,” Arora said.

Google Chief Executive Larry Page called the seismic shift from desktop to mobile a “tremendous opportunity for Google.”

“We want to make advertising super simple for customers,” he said during a conference call with analysts.

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Adding to Google’s lackluster financial results was a $342-million operating loss at Motorola Mobility, which is expected to introduce a new phone, the Moto X, this summer.

Google earned $3.2 billion, or $9.54 a share, in the second quarter, up 16% from $2.8 billion, or $8.42, a year earlier.

If not for the costs of employee stock compensation, the company said it would have earned $9.56 a share, below the consensus estimate of $10.80.

Revenue rose 19% to $14.1 billion from $11.8 billion. After subtracting Google’s ad commissions, revenue was $11.1 billion, also below analyst projections.

Google shares, which closed down $7.87, or less than 1%, at $910.68, fell 4% to $872.99 in after-hours trading.

Mobile was also an Achilles’ heel for Microsoft, which was hammered by costly investments in tablet computers in its fiscal fourth quarter. The Redmond, Wash., company booked a $900-million write-down for slashing the price on the Surface RT to $349 this week in an attempt to lift sluggish sales.

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The price cut contributed to a fourth-quarter earnings miss, but was not solely responsible. Instead, the long, steady decline in the PC market as people switch to mobile devices took much of the overall blame for the shortfall.

Revenue from Microsoft’s Windows business rose 6% to $4.4 billion. But without the revenue from discounted upgrades to users of older systems, Windows revenue fell 6%. At the same time, Windows 8 has not been well received by consumers since being released last fall.

Chief Executive Steve Ballmer last week announced a sweeping restructuring of Microsoft to goose the company’s momentum in tablets and smartphones.

Fourth-quarter net income was $4.97 billion, or 59 cents a share, compared with a loss of $492 million a year earlier, when Microsoft wrote down the 2007 purchase of online advertising service aQuantive.

Excluding the Surface charge, earnings were 66 cents a share, below the 75 cents a share that analysts had forecast.

Revenue was up 10% to $19.9 billion, but below the $20.72 million that analysts expected.

Microsoft shares, which closed down 30 cents at $35.44, fell 6% to $33.29 in after-hours trading.

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jessica.guynn@latimes.com

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