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Motorola Is Still a Drag on Google's Bottom Line

NEW YORK ( TheStreet) -- Despite announcing third-quarter earning that surpassed Wall Street estimates, Google (GOOG - Get Report) still has a problem on its hands -- Motorola Mobility.

Google registered $14.95 billion in revenue, excluding traffic acquisition costs (TAC), earning $10.74 per share. Based on the past two quarters, analysts had expected less. In response, Google shares gained 13.8% to finish at $1,011.41.

But Motorola was another story. Google's smartphone division posted an operating loss of $248 million -- much wider than from a year ago (a loss of $192 million), but better than last quarter's (a loss of $342 million). Revenue dropped to $1.18 million, down 33% from a year ago.

A large portion of Motorola's losses could be attributed to the development of the recently released Moto X smartphone and the creation of the new assembly line to build the devices in Fort Worth, Texas. Buyers can configure their X phone online and select preferred colors, covers and even internal memory. So far, AT&T (T) has the configuration exclusive. The same online service for Verizon (VZ) and Sprint (S) is set to begin in the coming weeks. An all-black T-Mobile (TMUS) version is only available directly from Motorola and costs $600.

In our tests, we found the Moto X to be a terrific device -- a first-class performer and simply a blast to use. You can see our review here.

During Thursday's earnings call, Google officials said they weren't that worried about Motorola division's losses. Explaining that Motorola was still a work in progress, Google said it was pleased with the Moto X's initial reception and will continue to boost the Motorola brand's marketing and distribution in the future.

Other smartphone manufacturers are watching just how big a threat the Google-owned division might become. As long as Motorola continues to underperform, competitors such as Samsung and HTC will continue to create new and better Android devices. But, if and when Motorola begins to turn the corner, expect to hear a lot more discontent.

Samsung and HTC are quietly investigating other options. Samsung is reportedly working on a updated version of another Linux-based operating system "MeeGo" last seen in Nokia's (NOK) ill-fated N9 model. The N9 was released just as Nokia was finalizing its Windows Phone deal with Microsoft (MSFT). HTC is said to be in negotiations to create/manufacture a rumored Amazon (AMZN) Kindle smartphone.

Earlier this year, Motorola singed an agreement with Verizon making the Google arm the exclusive manufacturer of Droid smartphones. Current models include the Droid Ultra, Droid Ultra Maxx and Droid Ultra Mini.

Written by Gary Krakow in New York.

To submit a news tip, send an email to tips@thestreet.com.

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