Recent letdown raises stakes on Google's 1Q report

SAN FRANCISCO (AP) ? Google's first-quarter earnings should give investors a better sense of whether an unexpected drop in its advertising prices late last year was just an aberration or the start of a trend that could slow the company's growth.

WHAT TO WATCH FOR: The report, due out after the stock market closes Thursday, follows one of the biggest financial letdowns since the Internet search company went public in August 2004.

In the final three months of last year, Google Inc.'s net revenue fell nearly $300 million, or 3 percent, below analyst estimates. Adjusted earnings per share missed Wall Street's target by 10 percent.

The numbers alarmed investors. Google's stock price plunged by more than 8 percent in the shares' biggest one-day drop in nearly four years.

Most of the fourth-quarter concerns centered on an unexpected drop in Google's prices for search-driven ads. The so-called "cost-per-click" for those text ads declined 8 percent from the same time in the previous year. The average price in the October-December also dropped 8 percent from what advertisers paid from July through September.

But the decreasing prices were offset by substantial increases in the number of times that people click on the ads. That's important because Google usually gets paid only when an ad link gets clicked. The heavier clicking volume helped Google bring in more revenue, although not as much as analysts had hoped.

Wall Street has been swapping various theories for the drop in Google's ad prices. Some analysts believe it reflects a shift to more searches on smartphones, where advertising rates are lower than on laptop and desktop computers. Others are worried the downturn in ad prices is a sign that marketers are becoming less reliant on Google. It faces competition from Internet social networking leader Facebook Inc., which can collect more personal information and use that to more easily target prospective customers most likely to buy a particular product or service.

Google's first-quarter expenses also are likely to be a focal point of the report. Investors have been scrutinizing Google's expenses more carefully since co-founder Larry Page became CEO a year ago. Page has pledged to make expensive investments in employees and projects that he believes will boost the company's long-term returns. That philosophy can depress the quarterly earnings that propel stock prices.

In the first nine months of Page's tenure, Google added more than 6,100 employees to increase its workforce by 23 percent.

If he follows the script of recent quarters, Page will likely devote part of the first-quarter conference call discussing the growth of Google Plus, the Facebook alternative that launched last summer. Page has made Google Plus the centerpiece of his efforts to tie all of Google's services together. In an open letter last week, Page boasted that Google Plus had "well over" 100 million active users. He may provide more specifics in the conference call.

Analysts also will likely inquire about the status of Google's proposed $12.5 billion acquisition of cellphone maker Motorola Mobility Holdings Inc. The deal was announced last August and has received all the necessary regulatory approvals it needs except in China, where Google's government relations have been strained since it moved its search engine out of the country two years ago in a dispute over censorship and computer security.

WHY IT MATTERS: As the Internet's main gateway, Google is one of the world's most powerful companies. Its fortunes and decisions have ripple effects on millions of people and companies.

WHAT'S EXPECTED: Analysts polled by FactSet expect earnings of $9.64 per share, excluding expenses for employee stock compensation, on revenue of $8.09 billion, after subtracting Google's ad commissions.

LAST YEAR'S QUARTER: Google earned $1.8 billion, or $5.51 per share, on revenue of $8.58 billion at the same time last year. The results were clipped by a $500 million charge to cover a settlement of a U.S. Department of Justice case alleging Google had illegally profited from selling ads to unlicensed pharmacies.

Excluding stock compensation and the charge, Google earned $8.08 per share on revenue of $6.54 billion, after subtracting ad commissions.

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