If you’re wondering how the famously tight-lipped Google did in its first quarter, which it will report on Thursday, here’s an early clue: Spending on search marketing overall–which Google dominates with nearly a 75% market share–rose 20% in the first quarter from a year ago, according to the search marketing firm Efficient Frontier. Although it fell about 8% from the seasonally strong fourth quarter, that’s about half the usual drop. The upshot: Investors may well get a bit of an upside surprise from Google.
“The market is picking up quite a bit,” Efficient Frontier CEO David Karnstedt told me Monday. More promising yet, the company has already raised its forecast for search spending growth to 15% to 20% this year, from its 10% to 15% estimate last quarter, when it noted the best search business in a year. The strongest sector remains retail, a Google stronghold–yet another indication that the search giant’s quarter probably came in better than expected.
Nothing in the report indicates Google faces serious competition yet, though Microsoft’s Bing showed big yearly gains in share of clicks and ad spending. But Yahoo, whose search business Microsoft is taking over, continued to lose ground. So the net outlook for Microsoft remains uncertain.
Last year’s first quarter was particularly bad for search ads, so it would be too easy to overplay the turnaround. But as Efficient Frontier says in its report, there are several reasons for optimism:
One, impression volumes are higher in all sectors as compared to a year ago indicating greater consumer interest. Second, CPCs have made a broad recovery indicating greater demand and larger budget appetites from advertisers. Third, the broader economic conditions appear to have stabilized, a trend that will result in a lift in consumer purchasing and companies advertising online.
Google could still disappoint investors, who sold shares in January when its fourth quarter, despite easily beating analysts’ official expectations, didn’t meet their outsized hopes. As Broadpoint AmTech analyst Ben Schachter says in his most recent report on Google, that scenario could play out again:
We believe upside is likely when GOOG reports its 1Q’10 results, as the broader macro recovery has driven sequential CPC improvements and volumes remain solid. We are increasing our 1Q net revenue sequential growth estimate to flat (from down 1.5%), which implies modest growth after adjusting for the impact of a stronger U.S. dollar q/q. Our 1Q non-GAAP EPS estimate goes to $6.71 from $6.62, while our 2010 EPS estimate goes to $28.02. We expect numbers for GOOG will trend higher, but investors should be prepared for continued multiple pressure due to ongoing regulatory/legal headlines and fear of mobile usage patterns.
Regardless of what the traders do, however, it’s becoming clear that as Google and others always predicted, search ad spending is leading the online ad business out of the recession.