By Alexei Oreskovic
SAN FRANCISCO (Reuters) - Google Inc's first-quarter revenue fell short of Wall Street targets and margins narrowed as the price of its ads continued to decline, underscoring the challenges Internet companies face as the world shifts toward mobile devices.
Shares of Google were down 3 percent to $539.80 in after hours trading on Wednesday, after initially sliding roughly 6 percent on the news.
The number of "paid clicks" by consumers on Google's ads increased by 26 percent in the first quarter, disappointing some analysts who had hoped for stronger volume growth. And the average "cost per click" declined 9 percent, extending a downward trend as mobile advertising, typically cheaper than traditional online ads, make up a bigger slice of its business.
The world's largest search engine, along with Facebook Inc and Twitter Inc, which are due to report financial results in coming weeks, are revamping their products and advertising business to account for smartphones.
"It's an average quarter from a great company," said BGC Partners analyst Colin Gillis. "It's the same old story. Paid clicks were a little lighter than people might have hoped, CPC declines were a little higher than people would have liked, expenses continued to rise."
Operating income slipped to 32 percent of revenue on an adjusted basis, from 34 percent in the year-ago period.
Google is spending big to push into various new markets with innovations such as wearable computers, ultra high-speed Internet access and home automation. In January it acquired Nest, which makes smart thermostats and smoke detectors, for $3.2 billion (1.9 billion pounds).
The Nest purchase and some legal expenses bumped up Google's spending during the quarter, Finance Chief Patrick Pichette said during a conference call on Wednesday. But aside from those items, "our expenses continue to demonstrate the same disciplined agenda we've always had," he said.
Sales of digital media such as movies and games in Google's online Play store, as well as hardware devices such as the Chromecast television gadget, boosted Google's "other" revenue 48 percent year-on-year to $1.6 billion.
Google's revenue climbed 19 percent to $15.42 billion in the first quarter from $12.95 billion in the year-ago period. Analysts polled by Thomson Reuters I/B/E/S had estimated $15.54 billion. For a breakdown of other numbers: (http://link.reuters.com/sux58v)
Traffic acquisition costs, the fees that Google pays to partner websites that run its ads, were $3.23 billion, or 23 percent of advertising revenue.
Google's advertising rates, like those of other Internet companies including Yahoo Inc, has been under pressure as more consumers access its online services on mobile devices such as smartphones and tablets, whose advertising rates can be half as much as on personal computers, according to Needham & Co analyst Kerry Rice.
Google's ad prices are also under pressure as the company expands into emerging markets, where ad rates are lower, said Rice.
Google Chief Business Officer Nikesh Arora said prices of mobile ads will eventually catch up to prices of online ads that appear on desktop PCs, as improvements in mobile search capabilities and mobile websites make it easier for consumers to buy things on a smartphone's small screen.
Arora did not provide a time frame, though Needham analyst Rice said he did not expect the change to happen overnight.
"We've probably seen the bottom, but I don't expect some rapid improvement," said Rice.
Google posted $3.45 billion in net income, or $5.04 per share, in the three months ended March 31, compared to $3.35 billion, or $4.97 per share, in the year-ago period. Excluding certain items, Google earned $6.27 per share.
Google reported a $198 million net loss from "discontinued operations," which includes the Motorola smartphone business. Google announced plans in January to sell the money-losing business to China's Lenovo for $2.91 billion.
(Reporting by Alexei Oreskovic; Editing by Richard Chang)