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Google Dives After EPS Fall, Sales Miss On Motorola Woes

Google (GOOG) stunned Wall Street with a third-quarter earnings decline and weak revenue amid Motorola integration woes and falling online ad rates, sending shares sharply lower Thursday.

Earnings fell 7% to $9.03 a share excluding items, the first decline in at least four years. Revenue, minus the commissions it pays to other websites to carry ads, jumped 51% to $11.33 billion, inflated by Google's recent Motorola Mobility acquisition. Wall Street had seen EPS of $10.65 on core revenue of $11.86 billion.

Blame cell phone maker Motorola, which Google bought in May, for the miss, say analysts.

"Motorola was a problem," said Wedge Partners analyst Martin Pyykkonen. "Either they didn't get cost out of there in the time they thought they would, or investors were too optimistic.

Hardware Issue Motorola revenue was "down meaningfully" vs. Wall Street's expectations, according to Barclays analyst Anthony DiClemente.

Q3 is the first quarter Motorola's earnings have been reported fully as part of Google's results. And the hardware maker is still hemorrhaging money, reporting a Q3 loss of $527 million. Motorola revenue was $2.58 billion, while some analysts had been expecting as much as $3.25 billion, writes Jefferies analyst Brian Pitz in a research note.

"We're just at the beginning of the Motorola-Google story," Google CFO Patrick Pichette told analysts on a late conference call. Investors should be ready for "variable" results from Motorola for the foreseeable future, he says.

Google surprised investors Thursday afternoon when its publishing partner, R.R. Donnelley & Sons (RRD), mistakenly released a draft of the company's results four hours ahead of schedule.

The error at about 12:40 p.m. set off a wave of selling. Google shares fell 9% in about 20 minutes before trading was halted. After trading finally resumed, Google closed down 8% at 695. Shares inched up after hours.

CEO Larry Page apologized for the error late Thursday on a conference call with analysts.

More Ads, Lower Rates As expected, the cost-per-click rate, or CPC, that advertisers were willing to pay Google dropped for a fourth straight quarter, falling 15% even as the number of clicks shot up 33%.

That's a key metric, as it's one of the only measures of ad health that Google releases. The ongoing CPC decline reflects its shift toward mobile advertising. It's an industrywide change that's drawing more mobile clicks that are worth less for Web giants like Yahoo (YHOO) and Facebook (FB).

Yahoo shares fell less than 1%. Facebook lost nearly 5%.

Observers say they're not worried about the CPC drop, because mobile advertising is expected eventually to be more valuable, and whoever has the clicks will benefit. Still, the drop was more than some had expected, writes Cantor Fitzgerald analyst Youssef Squali.

'Quite A Business' Google's mobile revenue is now at a rate of more than $8 billion a year, Page told analysts. That's up from $2.5 billion at this time last year, although those figures are a little misleading. Last year's number was only for mobile ads, while this year's includes consumers buying songs, movies and apps in Google's online Play store.

Still, "that's quite a business," Page says.

Google's stock plunge came not long after shares rose for 12 consecutive weeks to a record high.

"We believe the sell-off presents a buying opportunity," writes analyst DiClemente, "as we think the Street was overly optimistic going into the quarter."