Investors to Yahoo: Growth, Please

Can Yahoo grow again? That’s the question that has been dogging the Internet uberportal for years, and its second quarter report won’t change that question. Revenues rose just 2%–not an unexpected showing but disappointing to investors nonetheless. It also doesn’t help that Yahoo actually lowered its revenue expectations for the full year by $70 million, representing a drop of 11% from 2009. In after-hours trading immediately after the announcement, shares fell about 5%.

The basics vs. analysts’ forecasts:

* Gross revenues of $1.6 billion came in a little lower than the $1.64 billion forecasts.

* Operating income of $175 million came in just under expectations of $178 million.

* Net income of 15 cents a share topped forecasts by about a penny.

You can hear the analyst call and see financial slides here,  as well as all the numbers here, so I’m not going to liveblog everything, but will present some of the highlights from CEO Carol Bartz and the analysts’ questions.

CEO Carol Bartz opens the analyst call and concedes Yahoo came in at the low end of its revenue guidance. Income from operations, up 32%, was pretty good, she said, but she immediately addressed why revenue disappointed: Yahoo didn’t monetize searches as much as expected. In the second week of June, Yahoo also saw a number of major customers hold back on ad buys. She says that situation has improved since then, however.

She says the most important metric to track is engagement with its users. She points to the recent acquisition of Associated Content and Yahoo’s Upshot as examples (though I’m not entirely clear how) as well as social, with Yahoo’s Pulse, and social games, with the agreement to host games from Zynga. She also mentions “one of my favorites,” Bikini 101. Ack.

Bartz says things are more promising in display. On Yahoo’s own sites, display ad revenue rose 19%. That’s partly thanks to new ad formats that are getting people to click and watch.

All in all, I’m doubtful this update will jazz investors. But then, Bartz has always said Yahoo’s turnaround is a multiyear project. She’ll probably be right.

On to the questions:

Is display ad sentiment getting back to that double-digit level after the mid-June swoon? I didn’t catch a solid answer from Bartz.

Why did page view growth decline 4% despite the World Cup? CFO Tim Morse: Talks about difficulty of which metrics to use but concedes the decline is “a little surprising.” Says Yahoo thinks it’s starting to see traction on some of the new initiatives.

When will the transition to a new paid search system happen? Bartz: Still shooting for October.

Was there also a decline in search ads budgets the last few weeks of June? Bartz: Search was actually sluggish for us the whole quarter?

How about mobile? Bartz: Very small percentage but very very important for the future.

Any details on where cost cuts are coming from? Morse: Across the board. Trying to self-fund each initiative.

Can Yahoo still command premium display ad prices? Morse: Yes, on home page and Yahoo Mail log-in pages. Bartz: Our guaranteed pricing was up a lot. Non-guaranteed (remnant ads) down.

Yet another question on why display ad forecast isn’t up much if at all for the third quarter. Morse: Q3 always tougher to call because it always comes down to September. Bartz: Consumer confidence is really weird now. So appopriate guidance.

And that’s about it. Yahoo’s shares are down almost 7% now.

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LIVE: Google’s Q2 Earnings Come in a Little Low

Despite some promising signs of a continued rebound in search advertising, Google reported second-quarter results that met analysts’ revenue expectations but came in lower than they forecast on profits. Shares are down almost 4% in after-hours trading after closing up a fraction in today’s trading.

I’ll liveblog the earnings call starting at 1:30 p.m. Pacific. The release is here, and you’ll be able to view the earnings call on YouTube.

Google’s revenues rose 24%, to $6.82 billion, or $5.09 billion after costs of acquiring traffic, a fraction above analysts’ average $4.99 billion forecast. Profits came in at $1.84 billion, or $5.71 a share–more importantly, absent special items, profits were $6.45 a share, under the average forecast of $6.52 a share.

And the call gets underway with Chief Financial Officer Patrick Pichette, product chief Jonathan Rosenberg, and sales chief Nikesh Arora. Same as last quarter, we’ll miss CEO Eric Schmidt and cofounders and presidents Sergey Brin and Larry Page, who aren’t on the call.

Pichette goes over the numbers, says it was a “solid” quarter. Immediately goes into ads–he says consumer packaged goods giant (and ad spending giant) Procter & Gamble is Google’s largest advertiser.

Display network, including YouTube, is growing rapidly. Mentions new deal with Omnicom, announced today. Very impressive growth at YouTube as brand advertisers like Coca-Cola and Nike see it as a “must-buy.” Pichette crows a bit about Google’s win in Viacom’s suit against YouTube and says Google spent $100 million to win it.

More details on the numbers–you can see those in the release…. “We’re very confident of our future,” he concludes., which is why Google is continuing to hire.

Now Rosenberg, first on search: The Web is much more complicated today than just bringing back links to pages. Caffeine, a new way to update Google’s index almost immediately, is producing results 50% fresher than before (whatever that means). Pace of search innovation is actually accelerating, he says, somewhat defensively.

Rosenberg notes that people simply don’t have to watch ads anymore if they don’t want to–so there’s lots of upside left in improving ads. Carnival Cruises increased ad response by 175% by including click-to-call on mobile ads. 20 quality improvements on Google Display Network–which he says is going “very well.” Advertisers can now target very specific audiences, like women 25 to 34 who are basketball fans.

On mobile: There are now 70,000 apps on Android.

Back to Pichette for the Q&A:

Q: How much of paid clicks are coming from mobile? Rosenberg: Mobile is certainly growing faster than other areas, but no specifics.

Q: Traffic acquisition costs–how will end of MySpace deal affect that? Pichette: Not much.

Q: 1,200 head count increase mostly in search? Pichette: 300 came from acquisitions. Most headcount is in engineering and sales–in four core areas: search, mobile, apps, display.

Q: Cost per click in mobile vs. desktop? Arora: nothing specific I could hear.

Q: How much investment is going into Android? And what’s the payoff? Pichette: Android costs not material to company. Key products recently not developed by Google at all.

Q: Is search activity strong on mobile/Android, or are you losing momentum to apps? Rosenberg: Android searches strong. Pichette: Mobile traffic has grown 500% in the last five years.

Q: Impact of macro economic picture: Pichette: We’ve seen no impact of what’s going on in the macro world to us. Says Google has been doing very well for several quarters now.

Q: Return cash to shareholders given cash flow? Pichette: Just-announced $3 billion commercial paper program provides working capital flexibility. But nothing to announce on share buybacks.

Q: Advertiser and user adoption of new ad formats having impact on results yet? Rosenberg: Click to call ads on mobile are doing very well.

Q: What are operating margins in display ad business? Pichette: Display has slightly lower margins than search, especially including DoubleClick.

Q: Why is rest-of-world growing relatively faster, and which areas? Pichette: Brazil and India growing very well, though lower CPC (click prices) because there’s a lot of auction competition.

Q: Potential for revenues beyond advertising in mobile, such as apps? Pichette: Yes. But ads are nascent, so still a big opportunity.

Q: Why such a large increase in general/administrative costs vs. marketing? Pichette: Recruiting machine growing. Also legal costs–lots of them.

Q: Is YouTube profitable yet? Pichette: No comment, but “we are incredibly pleased with YouTube.” Over 1 billion monetized videos per week.

Q: Are you selling display ads mainly to existing search customers or new customers? Arora: Both, but more integrated search and display campaigns.

Q: With consistent paid-click growth of 15%, what’s driving that? Pichette: Continued move of ads from offline to search ads.

Q: Why cap ex and hiring on the rise? Pichette: “For us, the recession is over.” So need to invest in big opportunities like mobile and display.

Q: Will Google change how it measures or does searches (Microsoft’s and Yahoo’s auto-roll slide shows end up being counted as searches): Rosenberg: No. Those are not bonafide, user-driven searches from an advertising point of view.

Q: Any more details on which regions/countries doing especially well? Arora: Brazil, India, Russia, France, Australia… and others.

Q: More light on CPC and why it’s down a bit? Rosenberg: Conversion rates are improving, which drives CPCs up. Emerging markets, mobile, and longer-tail queries that aren’t as monetizable lower them.

Q: China update: Pichette: Revenue is not material, but “decent” revenues for Q2. Too sensitive to talk much more.

Q: Click-through rate on mobile vs. desktop: Rosenberg: Won’t break that out.

Q: Any detail on Omnicom deal? Arora: Generally, there’s a move from site buying to audience buying. Need system like Google’s ad exchange to buy across many sites and ad networks. Ad agencies want a common platform for all these networks.

Q: What kind of growth have you seen for search remarketing? Arora: We don’t do search remarketing. Only on display side.

Q: How decide what to pay for acquisitions? Pichette: Three factors in acquisitions: talent, intellectual property, and price. We look at many companies we don’t buy because they aren’t a fit. Or they cost too much.

Q: How additive are mobile searches? Rosenberg: No data, but intuitively “vast majority” are additive.

Q: Impact of Viacom ruling on ability to monetize YouTube: Arora: Lots of opportunities to monetize, including home page (which don’t necessarily involved any issues in the YouTube suit). Pichette: Otherwise, no comment because case in still on appeal.

Q: How rank YouTube, display network, and ad exchange, as display opportunities? Arora: They’re all complementary. Pichette: These are each billions of dollars opportunities.

And that’s it.

Search Ads Continue to Surge; Good News for Google?

Given the even sorrier state of the economy a year ago, it’s not hard for any industry to show an improvement. But even though search ads didn’t slump nearly as much as every other kind of advertising, it’s continuing to show strong improvement, according to a new report from search marketing firm Efficient Frontier. That’s likely to bode well for Google, which reports its second-quarter earnings on Thursday. From the report, released this morning:

In Q2 2010, the search marketing sector continued to bounce back, shrugging off a still uncertain economic environment. Year on Year (YoY) spend was up 24%, with a 9.7% increase in spend Quarter on Quarter (QoQ), partly due to a recovery in Cost Per Click (CPC) prices which rose across all of the major search engines. Overall, return on investment (ROI) in search was up 4% YoY and 10.6% higher than last quarter (Q1 2010). Search marketing growth continues to exceed the 2010 outlook of 10-15% due to increased consumer demand, which results in higher pricing as indicated by higher CPCs.

In the first half of 2009, search felt the adverse affects of a sputtering global economy. In sharp contrast to a year ago, search marketing in Q2 2010 is showing a strong recovery. Marketers shook off the continued economic uncertainty and capitalized on improving return on investment from search advertising to grow sales volume.

The retail sector leads the recovery with 38% growth in spend YoY and 16% growth QoQ, a pace that far exceeds the typical modest quarterly rise in Q2. Building on the momentum of Q1’s strong growth, retail CPCs continue to grow at 18% YoY and 17% QoQ, indicating a growing aggressiveness on the part of advertisers in this sector. Consumers are also playing their part in driving the recovery. Impression volume in the retail sector was up 65% YoY, signaling continued consumer interest in online shopping.

Here’s the rundown, sector by sector followed by Efficient Frontier:

• Retail: Spend was up 38% YoY due on strong consumer and advertiser demand.

• Travel: Spend was up 10% YoY on CPC gains.

• Finance: Spend was down 2% YoY due to a decrease in CPCs that was largely offset by volume growth.

• Auto: Spend was up 6% YoY on CTR and CPC gains.

Meantime, while Microsoft’s Bing search engine continues to gain, it’s at the expense of Yahoo, not Google, at least when it comes to search spending. Efficient Frontier says Google continues to hold 75% of search spending, while Bing has 6.4%, up from 6.1% in the first quarter, and Yahoo’s share fell from 18.7% from 18%.

Another search marketing company, SearchIgnite, reported similar trends. It says search spending rose 14% in the second quarter, accelerating from 11% in the first quarter. Spending on Bing rose 26%, giving it a 6.2% share, Yahoo was up 3% to get 15.4% share, and Google remained dominant with a 16% uptick, hitting 78.4% market share.

ComScore’s latest numbers also show Google lost a small amount of search market share to Bing and Yahoo, though analysts note that a change in how comScore measures searches makes the shift’s significance uncertain.

All that indicates Google’s second quarter will look pretty good. Analysts on average are expecting its revenues to rise almost 23%.

Investors will be looking forward more than back, however. Google is notoriously stingy with outlooks, so for now Efficient Frontier’s will have to suffice, and so far, not surprisingly given the iffy state of the economy, it’s a mixed picture:

The last two quarters have shown strong growth in terms of SEM spend (20% YoY in Q1 and 24% YoY in Q2) and we expect the positive trends to continue for the second half of the year. CPCs continue to make a strong recovery, indicating growing demand and larger advertising budgets which should continue to contribute to the expected growth in the coming quarters. However, weakness in the European economy might negatively affect Q3, so we remain cautious as we keep our SEM growth expectations in the 15-20% range. Should we continue to see strength in Q3, and taking into account typical strength in Q4, the year could surpass our already upwardly revised expectations.

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