Google Stumbles in 2Q as Slump in Ad Rates Deepens

Google views the computing shift to smartphones and tablets as a golden opportunity, but the internet-search leader’s second-quarter performance served as an unsettling reminder that it poses a nagging financial challenge, too.

The report, released Thursday, showed Google’s average ad rate fell from the previous year for the seventh consecutive quarter. In an unexpected turn, the decline deepened for the first time in a year.

The average ad rate, or “cost per click,” fell by 6 percent during the three months ending in June. The magnitude of the declines had eased in each of the previous three quarters, raising hopes that the worst was over. Instead, things deteriorated from the 4 percent decline in ad rates during the first three months of the year.

The regression undercut earnings and revenue. Both fell below analyst forecasts, scaring off some investors. Google’s shares fell $40.79, or 4.5 percent, to $869.89 in extended trading after the results came out.

Although the problem isn’t as severe as at other companies, including computer makers such as Dell Inc. and Hewlett-Packard Co., Google is still having trouble navigating a technological transition driving more online activity to smartphones and tablets. Those devices pose a financial challenge for Google Inc. because their smaller screen sizes fetch lower ad rates than the marketing pitches made on traditional desktop and laptop computers.

Google is in a far better position to prosper from mobile computing because it makes Android, the most widely used operating system on smartphones. The software also is gaining traction on tablets, challenging Apple’s pace-setting iPad.

Android typically features Google’s search engine and other services, such as maps and Gmail, giving the company more opportunities to show ads.

Now, Google is taking steps to persuade advertisers to pay higher prices to connect with consumers on mobile devices at times when they appear to be mulling a purchase or may be in a merchant’s neighborhood.

Google is trying to drive up prices more quickly by changing the way it sells ads, to prod more marketers into buying spots on mobile devices at the same time they plan campaigns aimed at PCs. About 6 million advertisers have already switched to Google’s new pricing system. All marketers will be forced to adopt the new approach, known as “enhanced campaigns,” by the end of the month.

Google earned $3.2 billion, or $9.54 per share, up 16 percent from $2.8 billion, or $8.42 per share, a year earlier.

If not for the costs of employee stock compensation, the Mountain View, Calif. company said it would have earned $9.56 per share. That missed the average target of $10.80 per share among analysts surveyed by FactSet.

Revenue rose 19 percent to $14.1 billion, from $11.8 billion.

After subtracting Google’s ad commissions, revenue stood at $11.1 billion — about $275 million below analyst projections.