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Clicks on ads a boon for Google

Jul 20 2012 10:19

San Francisco - Google is getting even better at showing online ads to the right people at the right time. That enabled the internet search leader to hit analysts' earnings target for the second quarter and reassure investors about the company's moneymaking prowess.

The results announced Thursday were muddled by Google's recently completed $12.5bn acquisition of cellphone maker Motorola Mobility Holdings and a dramatic swing in currency exchange rates that resulted in European sales converting into fewer US dollars than at the same time last year.

This much is clear though: Google has refined its selection and presentation of its Internet ads in a way that is more appealing to its users.

The company, based in Mountain View, California, has accomplished it by analysing the data that its search engine gathers about people's interests to determine how and when to present an ad. Ideally, Google wants to show more ads when a user's request appears driven by a desire to buy a product, book a vacation or engage in some other kind of commercial transaction.

"We're serious about providing more intelligent results," Susan Wojcicki, Google's senior vice president of advertising, said Thursday during a conference call to discuss the second-quarter earnings. "We're moving beyond a search engine that just matches strings of words to one that understands people, the world, the way people do."

As expected, Google CEO Larry Page skipped the conference call while he recovered from an unspecified throat problem that the company revealed at its annual stockholders' meeting last month.

Google's search improvements appeared to pay off during the three months ending in June as the total number of clicks on Google's ads surged 42% from the same time last year. That's the highest increase since Google began to report the clicking volume on its ads four years ago.

The clicks are crucial to Google because they trigger the advertising payments that account for most of its revenue.

Google's gains in the quarter were offset by a deepening decline in the prices that it is fetching for ads. The average price per click plunged 16% from last year. It marked the third consecutive quarter of year-over-year erosion in Google's ad prices.

The trend, in part, reflects that more Web surfing is happening on smartphones and tablet computers, where the ad rates are lower than on desktop computers. The smaller screens on mobile devices also leave less space to show ads.

Google believes mobile ad rates will steadily rise as the nascent market matures and the company develops new ways to connect marketers with prospective customers, including on internet-connected glasses that the company is testing.

Investors evidently liked what they saw in the second-quarter numbers. Google shares gained $15.94, to $609 in Thursday's extended trading. The stock closed Thursday's regular session at $593.06, leaving the shares down by 8% so far this year. In contrast, the Dow Jones Industrial average has risen by 6% and the technology-driven Nasdaq composite index has climbed by 13%.

Some of the doubts weighing on Google's stock center on Motorola Mobility, a troubled company whose products are less profitable than internet advertising.

Motorola suffered an operating loss of $233m on revenue of $1.25bn during the final 39 days of the second quarter that Google owned the company.

As a whole, Google earned $2.8bn, or $8.42 per share, during the three months ending in June. That compared with net income of $2.5bn, or $7.68 per share, last year.

The earnings would have been $10.12 per share, if not for Google's accounting costs for employee stock compensation and the Motorola deal. That figure was slightly better than the average estimate of $10.10 per share among analysts polled by FactSet.

Revenue climbed 35% from last year to $12.2bn. If not for Motorola, revenue would have increased 21%. That would have been Google's slowest rate of revenue growth since the fourth quarter of 2009, when the company was just starting to recover from the Great Recession.

Google's revenue, excluding Motorola, stood at $8.36bn after subtracting the ad commissions paid to is advertising partners. That was about $70m below analyst projections.

The company's slowing revenue growth stemmed primarily from the economic turmoil in Europe that has weakened currencies overseas.



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