3 Reasons Google Missed Q3 Earnings Estimates

From my Forbes.com blog The New Persuaders:

Google’s shares plunged this morning by 9% after the search giant’s third-quarter earnings came in considerably lower than expected. The results were accidentally released hours earlier than expected, leading to a halt in the shares’ trading for a time.

Google earned a $9.03 per share profit before certain expenses, far below the $10.63 Wall Street consensus estimate, and down 20% from a year ago. GAAP profit was $6.53. Net revenues after paying partners for traffic were $11.53 billion, up 19% from a year ago. That also missed the Street’s estimate of $11.9 billion. Paid clicks, a key indicator, rose 33% from a year ago, and cost per click, another key measure but one whose meaning is murky, fell 15%.

So what happened? Here’s a quick assessment, which will be supplemented in a new post following the 1:30 p.m. Pacific earnings call:

* Costs jumped. They were up 71%, to $11.4 billion. It appears much of that increase came from Motorola Mobility, which Google acquired for $12.5 billion in May. After all, the acquisition added more than 20,000 employees. As Citi analyst Mark Mahaney said in a note to investors: “Bottom line divergence partly due to Amortization expenses, which came in at $317MM vs. our $197MM estimate. That contributed perhaps $0.40 of the EPS shortfall.” Update after the earnings call: But not just that. CFO Patrick Pichette specifically mentioned costs of selling the likely near-zero-margin Nexus 7 tablet Google released during the quarter–a single product line, so the company’s is clearly pushing it hard.

* Motorola losses were huge. The unit posted a $527 million loss on a GAAP operating basis. Mahaney again:  “Another major delta was Motorola, which generated $151MM Op Loss vs. our $28MM estimate.”

* Ad revenue didn’t set records. It was up 16% from a year ago. Although lower cost per click isn’t always an indicator of a problem, in this case, the fourth consecutive decline has investors wondering anew if it’s due to the lower prices mobile ads get or even competition from the likes of Facebook. …

Read the complete post at The New Persuaders.

Marketers Send Facebook Message In Q2: Show Us

Facebook CEO Mark Zuckerberg (Getty Images North America via @daylife)

From my Forbes.com blog The New Persuaders:

Facebook may have disappointed investors with its first earnings report as a public company, but the results also reflect disappointment among an even more important group of constituents: marketers and agencies.

It’s not that Facebook did badly on the sales front. It exceeded admittedly dampened expectations, not to mention hitting the Street’s profit target. Nor do the folks who write the checks to run ads on Facebook spend much time watching FB on the stock ticker. “Whether the stock is up or down is not a big concern,” says David Berkowitz, VP of emerging media at Japanese ad giant Dentsu’s digital agency 360i.

What is? Results. While Facebook today trotted out plenty of stats and examples of success stories for the Sponsored Stories that it clearly views as the most effective ad it offers, the company hasn’t yet managed to close the deal for many marketers and agencies. “Facebook has to do a better job of articulating the value of its advertising to the brands,” says Heather Pidgeon, VP of services for iProspect, a digital agency owned by Aegis Group. “They have yet to say, ‘This type of advertisement works for this type of advertiser.'” …

Read the full post at The New Persuaders.

LIVE: Facebook Shares Plunge On Disappointing Q2 Earnings

English: Mark Zuckerberg, Founder & CEO of Fac...

Facebook CEO Mark Zuckerberg (Photo credit: Wikipedia)

From my Forbes.com blog The New Persuaders:

Facebook managed to hit the second-quarter earnings numbers investors had expected, but that wasn’t nearly good enough as shares plunged in after-hours trading.

The social network earned a non-GAAP 12-cent profit, on target with expectations, on revenues of $1.18 billion, the latter up 32% and a tad above estimates.

Ad revenue was up 28%, to $992 million, well above analysts’ forecasts, though still below the first quarter’s growth rate. Facebook suffered a net loss of $157 million, or 8 cents a share, largely because of accounting for employee stock plans post-IPO.

Shares rose as much as 6% in extended trading initially, but then quickly fell back almost 11%. That’s probably at least partly because Facebook didn’t offer a forecast, at least ahead of the conference call. They fell more than 8% at the market close today. They now sit at an all-time low of just under $25. That’s 37% below the $38 IPO price.

A quick take from Global Equities Research analyst Trip Chowdhry: “Overhyped and underdelivered.”

Here’s what CEO Mark Zuckerberg and other executives had to say about the quarter in the company’s first earnings conference call: …

Read the complete post at The New Persuaders.

Don’t Pay Any Attention To Facebook’s Q2 Earnings Report

From my Forbes.com blog The New Persuaders:

To hear almost everyone tell it, Facebook’s earnings results Thursday will be a huge test of whether it will become the blockbuster business success so many investors have bet on. “Facebook Efforts on Advertising Face a Day of Judgment,” intones the New York Times. “Big financial test for Facebook,” blares the dead-tree version of the hometown Mercury News. “There is a lot on the line,” writes the Wall Street Journal.

It’s all a crock. Manufactured journalistic drama. Not that any quarter for such a fast-growing, newly public, highly influential, and closely watched company is unimportant. Of course it’s important. Especially given the underwhelming IPO, investors have a right to information that might tell them if their shares will be heading up or down.

But this won’t be a bellwether for Facebook’s long-term future. Fact is, no one should look to this quarter, or even the next, to determine whether Facebook can fulfill expectations that it will become the next Google.

Why? Because it’s too early. Way too early. Nobody, probably including Facebook, yet knows for sure what kind of advertising and marketing works at large scale in social networking. Facebook is clearly experimenting with a variety of ad formats, such as its socially infused Sponsored Stories. Just as clearly, it’s not apparent that it has found its equivalent of Google’s search ad or television’s 30-second spot. …

Read the complete post at The New Persuaders.

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.

Eric Schmidt: Google’s Next Big Business Is Display Ads

Annual shareholder meetings can be anticlimactic snoozers, but often enough, Google’s are not. There was the time in 2008 when cofounder Sergey Brin abstained from a motion for Google to end its activities in China, on which the rest of the board voted no–providing a clue to Google’s recent decision to stop censoring search results in that country. And with many issues, from antitrust to Android’s challenge to onetime Google partner Apple, continuing to percolate, it’s worth hearing the latest official line from the company’s executives.

Indeed, judging from questions already posted on Google Moderator for the meeting, the interchanges could be lively. One question: “Google top management seems to be too egotistical and aloof about the stock price Shareholders are mad,the stock is down 21%YTD,You play catch up with apple with nexus one and now verizon tablet What is actually going on?” Hostile tone aside, interesting questions.

There are also several shareholder proposals, on China, behavioral advertising and privacy, and sustainability, all of which Google is officially opposing.

So I’ll liveblog the highlights of  the meeting here starting at 2 p.m. Pacific–and in the unlikely event there are any big surprises, I’ll also tweet them here. I’m told there will be a Webcast here, though it wasn’t listed on that page earlier today.

And we’re nearly underway, as Joe Cocker’s Feelin’ Alright and smells from the adjoining cafeteria waft across the room.

CEO Eric Schmidt comes onstage with what will be the usual board introductions, including John Doerr and cofounder Larry Page. And then the shareholder proposal presentations. First the proposal on asking Google to do a sustainability report. Then the proposal asking Google to strengthen its privacy policy, especially with regard to behavioral advertising. Finally the one calling for more protections for human rights in China–by a guy who I think has asked pointed questions at at least one previous annual meeting (I recognize his T-shirt). And, big surprise, they’re voted down.

Now Schmidt comes back on to talk about Google’s business. “We had a very good year.” And did better coming out of  the crisis than many other companies. Core business grew well, internationally and in the U.S. “So all is well after a year of great tumult.”

So what’s next: Schmidt shows a slide entitled “The rich Internet,” and explains the explosion of data, now about 800 exabytes (which is a billion gigabytes), from 5 exabytes from the dawn of civilization to 2003. “No wonder we all have headaches.” Except Google, of course, because search becomes all the more important with that infoglut.

“Search is no longer just a static Web page.” YouTube and search “audiences” are already larger than most television companies. Taking off in mobile too–number of mobile searches up five times from two years ago. “Search is not just a query”–Google Goggles lets you use a photo as a query. Also 550 quality improvements in the last three months.

Schmidt talks about what he calls “the engaging Internet,” like YouTube. Now all of a sudden, the ads need to be engaging too. In five years or so, “the ad we  grew up with will go away.” Click to call, direct links to store locations or the particular product being searched, etc.

“A huge success for us now is display.” DoubleClick was “money extremely well-spent.” Also announced an ad exchange. Some 60% of display advertisers are new to display. “This is probably our next huge business.”

Enterprise business is growing fast too–a few thousand businesses a day, he says, starting to use Google Apps.

Android is going to be either the No. 1 or the No 2 player in the mobile market–not sure yet. We’re trying to build an entire system of openness–the opposite of the other guys. (Yes, he used a plural, even though we all know he’s talking about Apple.)

The Chrome browser, he says, is also a huge success, because of speed, simplicity, and security. Schmidt says Chrome OS should become a third platform for computers (I guess Linux doesn’t count?).

OK, time for questions. Onstage are Schmidt, Page, search experience chief Marissa Mayer, products head Susan Wojcicki, CFO Patrick Pichette, and Kent Walker.

A guy from Consumers Union (I think) asks a couple of questions that seem rather inside-baseball. One is on use of SSL more broadly–Mayer says stay tuned. Another, more interesting: Is there a $700 million kill fee on the AdMob deal. Schmidt doesn’t say, but says he expects the deal to get approved because mobile is a “highly competitive market.”

Another guy asks a convoluted question about the mobile market, ending with: Why isn’t Google doing mobile devices and products more directly? Page says Google is making “tremendous progress” in those areas but thinks the best strategy is to provide a mobile platform.

Q: Is it over in China or what? Schmidt says Google wants to continue business operations in China, but the situation isn’t settled yet.

Q: Will Google run out of computer space for all that data? Mayer: It’s a big challenge to keep up with data, but that’s what makes it exciting. Wojcicki: Algorithms and better technology will improve Google’s ability to deal with growing data.

Q: What is the next big thing? Page: One of the next big things is translation. Other two-thirds of world population not yet online need that. I think that’s really going to significantly change the world.

Three people now have complained about the lack of responsiveness of investor relations. Pichette tries not to look too uncomfortable.

Q: What’s happening with that competition for Google to build a citywide fiber-optic network? Schmidt: Winnowing the list down but no decision yet. Page: We had an Olympics for trench diggers. (Yes, they did.)

And that’s it.


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