Google Earnings: Yet Another Internet Miss
Posted by: Rob Hof on January 31, 2008
Google didn’t miss Wall Street’s fourth-quarter earnings estimates by much, but it’s Google and every little shortfall matters. The miss was enough to send its stock falling about 7% in after-hours trading. The search giant said its net profit rose 17%, to 1.21 billion, or $3.79 a share. Subtracting stock awards to employees, profit was $4.43 a share, a penny shy of analysts’ estimates.
Sales rose 51%, to $4.827 billion, just a hair under analysts’ estimates. Revenue after payments to marketing partners, known as traffic acquisition costs, was $3.39 billion, also shy of analysts’ $3.45 billion estimate. Google doesn’t give guidance, so its results are often subject to guesswork by analysts.
After Yahoo missed estimates on its fourth-quarter earnings, investors were looking to Google for clues to whether the economic slowdown would hit online advertising. With the conference call about to start, it’s not yet clear what accounts for the earnings shortfall, or at least the perceived shortfall. But with sales more on target than earnings, it looks like expenses, in particular those traffic acquisition costs, came in high. More to come as the call starts. …
But a quick summary first: Execs are pretty firm that the slowing economy isn’t affecting Google yet. CEO Eric Schmidt declares: “We have not yet seen any negative impact from the rumors of a possible recession.” (Oral italics are his.)
So what was the main problem? Possibly MySpace. Google said that its ability to make money off social networking ads (it didn’t name MySpace, but it has a $900 million deal to supply ads to it) proved disappointing. So because it guarantees revenue to MySpace, Google easily could have come up short on making its money back from ads there.
The call starts: CEO Eric Schmidt calls out strong international growth. He also calls the fourth quarter "a solid quarter, without a question."
CFO George Reyes says AdSense revenues flagged a bit because of quality improvements that reduced the clickable area around content, which reduced clicks but increased return on advertising.
When talking about traffic acquisition costs, Reyes also says: "Social networking inventory is not monetizing as well as expected." Sorry, MySpace.
Execs say they'll continue to keep spending on data centers and other capital improvements.
Google hired only 889 people, which is the slowest rate of new hires in two years. That follows a couple of quarters of what even Google admitted was too-rapid hiring.
Schmidt summing up: "We're quite optimistic about '08."
Now to questions.
Question on why paid click growth was down 15%. Jonathan Rosenberg, senior VP of product management: Search ads grew faster than content ads, and Google weeded out low-quality (low click-through-rate if I heard right) ads.
Question about any impact from the slowing economy: Cofounder Sergey Brin: "We have not been able to detect any such effects from macroeconomic concerns." Rosenberg adds that direct marketing, which is what search advertising largely is, generally fares better in a downturn.
Question on Google's role in the wireless auctions: No comment. At all.
Will the European regulators approve the DoubleClick deal? No firm answer, of course, but Schmidt says, "We're very hopeful that they will clear (the deal) as well."
More questions on problems making money from social networks: Rosenberg says they haven't been able to slice up social networking pages enough to target demographic groups adequately. Brin adds: "I don't think we have the killer best way to monetize social networks. But it's a big opportunity" because it's such a large amount of inventory.
More thoughts: Some analysts focused on the decline in the growth of paid clicks in the fourth quarter--up 9% from the third quarter, compared with a 22% gain from last year's third to fourth quarters. The question is whether that decline in paid click growth is due to the economy. If so, look out. But Google execs seemed quite firm in saying they saw no negative impact from the economy yet. Since companies are usually only too happy to blame any shortfalls on the economy, Google should probably be taken at its word. In any case, the details of Google's miss show no indication any wheels are falling off.
Cynthia Brumfield at IP Democracy brings up a good point: Google's still a cash machine. Free cash flow, which is what's left over after what the company spends, including on capital improvements, more than doubled, to $1.1 billion. Google now has $14.2 billion in cash and marketable securities. Suddenly that $4.7 billion for the wireless spectrum doesn't look so crazy (though I still don't think the company will spend all cash on that, if it even wins).