First-Period Net, Out Today, Will Show Whether Worries Affecting Stock Are Justified
When Google Inc. reports first-quarter earnings after the market close Thursday, investors will find out whether their worries about the impact of the softening economy on Google search ads are justified.
Data from research firm comScore Inc. showing a drop in the number of times people click on the ads have fueled the jitters, which have already knocked almost $75 billion off Google's market value since the beginning of the year.
ComScore released new data late Tuesday estimating that U.S. consumer clicks on Google search ads in the first quarter declined 9.3% from 2007's fourth quarter, and rose just 1.8% from the 2007 first quarter. That compares with the 30% increase in fourth-quarter clicks from the year before that Google reported in January and a roughly 50% average increase during the previous four quarters. This "paid click" volume matters because Google gets paid for the small text ads it shows on Web search results pages only when a user clicks on one of them.
Investors worry that the Mountain View, Calif., Internet giant has finally grown to the point where its core U.S. search-ad business is more vulnerable to swings in the economy and less capable of producing the outsized growth that boosted the company and its shares in the past. That issue also has implications for the outlook for online advertising revenue in general, as well as Microsoft Corp.'s effort to double down on its exposure to Internet ads with an unsolicited bid to acquire Yahoo Inc.
Some analysts have concluded that U.S. consumers are clicking on ads less frequently because economic problems have made them less willing to buy things. "It's very similar to the shopping mall, where it's full of traffic and you see people window shopping but they're not buying anything," says Sandeep Aggarwal, senior Internet analyst at Collins Stewart LLC. He says people are using the Internet for email and reading news, but they're doing fewer searches for things like "cruise to Bahamas."
ComScore says its data don't support the idea that the economy is significantly affecting consumer search-ad clicking. "If it is, it's to a minor degree," says comScore Chief Executive Magid Abraham. (Google, like other Internet companies, is a paying client of comScore, though Mr. Abraham says comScore didn't have any contact with Google during the first quarter to discuss its search-ad data.)
Instead, Mr. Abraham and some analysts cite Google-initiated efforts that are affecting the number of clicks, such as a change that made it harder for consumers to accidentally click on ads. They also note that the click data don't take into account other factors affecting Google's revenue, such as the price paid for each click and international activity, which represents close to half of Google's revenue.
Mr. Abraham says comScore's data are "compatible" with first-quarter Google revenue growth of 5% to 10% from the fourth quarter, depending on such factors. According to analysts surveyed by Thomson Financial, Google is expected to report first-quarter revenue of $3.61 billion when certain payments to partners are factored out, a 6.5% increase from $3.39 billion on that basis in the fourth quarter.
Google declined to comment on the comScore data or its earnings report. When it posted its fourth-quarter earnings on Jan. 31, Google CEO Eric Schmidt said the company hadn't seen any impact from macroeconomic softening. In public comments since then, Google executives have said it isn't clear yet whether those problems will hurt its business.
Since going public in 2004, Google has sworn off giving any detailed public earnings guidance, which increases the difficulty of assessing any risks to its performance. That's a major reason investors turn to comScore's search-ad click data, despite analysts' warnings that the data haven't always predicted Google's results reliably in the past.
"The comScore click data has been a huge focus for the investment community and probably has been one of the bigger influences on the stock this quarter," says John Aiken, managing director of Majestic Research in New York.
ComScore's Mr. Abraham says some people have jumped to conclusions that comScore's data don't support. "People automatically assumed Google's revenue is going to be missing their target," he says. "People were assuming we said something we didn't say."
In 4 p.m. trading on the Nasdaq Stock Market Wednesday, Google shares rose 1.8%, or $8.19, to $455.03. They are down about 34% since the start of the year.
Mr. Aiken says his analysis of search-ad activity and conversations with search-ad buyers indicate that small- and medium-sized search advertisers are pulling back. Such a development would probably drag on Google's search-ad revenue, because about 99% of its more than one million advertisers and the majority of its revenue come from that category, according to people familiar with the matter.
Mr. Aiken says large search buyers are spending the same or more, and ad firms that work with large advertisers support that idea. "We don't really have any instances where we're seeing clients pull back their search ads," says Steve Governale, senior vice president and managing director of SMG Search, a unit of Starcom MediaVest, itself a unit of Publicis Groupe. If anything, big advertisers are shifting dollars to search ads because it can be easier to measure the revenue generated by them than it is for ads like glossy magazine spreads, some ad executives say.
Still, some analysts say ad spending is dropping in some industry areas most affected by economic problems, such as financial services. Spending by advertisers in the financial, travel and retail areas declined or grew more slowly in the fourth quarter, compared with a year earlier, Yahoo President Susan Decker told analysts in January, though she said that overall the company had seen "a solid start to the year."
It remains unclear how online advertising beyond search is affected by any consumer slowdown. Search advertising is the largest category of U.S. online ad spending, expected to account for 40% this year, according to research firm eMarketer Inc. Other forms of online advertising, such as graphic display ads and video ads, are generally priced using different models than per-user clicks.
EMarketer last month reduced its 2008 forecast for U.S. online spending because of concerns about the softening economy. U.S. advertisers will spend $25.8 billion on Internet ads, eMarketer says, down 6.2% from earlier estimates but up 23% from $21.1 billion in 2007.
By: Kevin Delaney
Wall Street Journal; April 17, 2008
