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.
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.