Google Facing the Heat From EU

The recently ended quarter did not bring in much good news for Google (NASDAQ: GOOG), again. This was the sixth consecutive quarter that Google’s earnings missed market expectations. Things don’t seem to be improving in the near future. The recent Yahoo and Firefox agreement has hurt Google as their US search share slipped to the lowest since 2012 to 64.4% in March this year. Additionally, Google’s continued investments in R&D to experiment with new offerings and recent antitrust claims filed by EU are making things difficult for them.

Google’s Financials

Google’s first quarter revenues grew 12% over the year to $17.26 billion, falling short of analyst expectations of $17.5 billion. EPS of $6.57 was also short of the market’s projections of $6.61 for the quarter. During the period, Google’s R&D costs increased 29.5% and sales and marketing costs increased 19%.

By segment, revenues from Google’s sites, which include Google and YouTube grew 14% to $11.93 billion. Network revenues grew 1% to $3.58 billion. Other revenues increased 23% to $1.75 billion.

Among operating metrics, aggregate paid clicks increased 13% over the year, but declined 1% over the quarter. Paid clicks on Google websites increased 25% over the year while paid clicks on Google’s Network Members’ websites fell 12% over the year. Aggregate cost per click fell 7% and cost per click on Google websites fell 13% over the year. Cost per click on Google’s Network Members’ websites improved 2% over the year.

This was the first quarter that Google broke out the metrics for its own and network members’ sites. Google did not disclose YouTube’s detailed financials, but they did say that YouTube would be profitable if Google did not keep reinvesting in the business to build new video products. Analysts peg YouTube’s revenues at $4 billion and are hopeful that as rivals like Facebook become more active on video services, Google will start to break out more details.

Google does not release an outlook, but the market is looking for revenues of $14.5 billion for the quarter with an EPS of $6.60.

Google’s EU Battle

Besides disappointing financial performance, Google is also facing a tough battle with the European Union. After five years of detailed scrutiny, the EU accused Google of abusing its dominant power in web search in violation of antitrust laws. The EU’s contention is that Google is promoting their own comparison shopping search engine and thus diverting traffic from rival comparison shopping services. The EU is also concerned that Google may have used its might to prevent market access to rival mobile apps by pushing Android phone makers to pre-install their suite of mobile services. EU opened a formal investigation into Google’s Android offerings.

Google has denied all allegations citing examples of the success of companies like Amazon and eBay as shopping engines. Regarding Android, Google is arguing that Android’s release has not only helped spur competition within the industry, but also helped lower prices. Google is now working on their formal response to the EU, but the market is worried that a legal battle with the EU will not only be expensive, but it could also lead to Google being asked to pay $6 billion in fines and edit their search algorithm.

Google’s New Offerings

Meanwhile, Google continued to release new services. The biggest news was the launch of the much awaited Project Fi. Project Fi is a mobile-focused Wi-Fi offering that will allow users to automatically connect to a free public Wi-Fi service. This marks Google’s entry into the wireless industry. The project will be available on Nexus 6 phones initially and will be hosted through Sprint and T-Mobile’s networks. Users will be charged $20 a month for access to Project Fi and an additional $10 a month for every gigabyte of data used. Overall though, Google is expecting to help users reduce their phone bills by curbing data usage on paid networks. Also, Google will charge the same price even for international users, which will make data usage significantly cheaper for international travelers.

They are also continuing to expand Google Fiber, the high-speed Internet service. They are working on expanding Fiber to 19 more cities in five metro areas including Salt Lake City, Atlanta, Nashville, Charlotte, and Raleigh-Durham.

Last week, Google also announced a change to their search algorithm. The latest change is targeted specifically for mobile screens and will now lower the search ranks of those sites that are not mobile friendly. Thus, sites like Microsoft’s Windows Phones homepage, which has very small text or close links will appear lower in the ranking. The change will not impact desktop search, but is expected to have a significant impact on the fast growing mobile device search. The move is expected to help Google improve their mobile search experience and thus drive higher mobile revenues.

Meanwhile, their stock is trading at $565.06 with a market capitalization of $384.59 billion. It touched a 52-week high of $599.65 in July last year.