Today, Google was among the first of the big Internet companies to report calendar Q4 2011. It's interesting to note that Microsoft and IBM decided to report today, too. Conspiracy?!?! Perhaps against Wall Street analysts - a busy day for them.
Google CEO Larry Page remarked in the earnings release that the company broke the $10 billion barrier - with traffic acquisition costs (TAC) - for the first time ever as the seasonal bump around the holidays and shopping ad spend helped push revenues higher. Foreign exchange affected the company negatively to the tune of $200 million. Additionally, the CFO Patrick Pichette said that adjustments to fine tune the search algo also hit revenue... this nugget proved to be rich fodder for analysts later on the call who nevertheless struggled to understand.
$8.13 billion in ex-TAC revenue worked out to $9.50 earnings per share. Wall Street analyst Citi's Mark Mahaney had expected "$8.30B in Net Revenue and $10.52 in Non-GAAP EPS." ...So not quite as good as The Street expected. Read the release including Google+ traction - the company claims 90 million Google+ users. More signal feeding the beast!
On The DoubleClick Ad Exchange front, the company said on the call that revenue was up 130% year over year but no one was breaking out exactly what that means. I would assume that's total transaction revenue through the exchange - where the margins and revenues (ex-TAC) lie may be small at this stage considering Google is in investment mode and it wants to encourage use of its ad tools and exchange, in particular. Also, the company reported that the number of advertisers using the DoubleClick Exchange have more than doubled year-over-year. I'd also assume that number is real, live advertisers rather than more DSP and ad network partners. Transparency into who's buying and selling has been a Google mantra.
Later on the earnings call, Google exec Nikesh Arora reiterated CEO Larry Page's comments and said that the "display run rate" has reached an annualized $5 billion and attributed some of the success to the ad exchange and Tru-View (skippable video ads). On the call, it was never 100% clear what that "display" number is but it seems like display (video, PC) and mobile - but not including search ads, of course, and not text ads on the AdSense ad networks as mentioned later by Pichette. That's odd.. text ads are display. Go ahead - add 'em in!
Arora said that brands are seeing the opportunity with online branding and said that YouTube video ads are at the center of this. That's the hope for sure.
Seemed like Europe was not a bright spot from a revenue perspective and, in fact, revenue growth in Germany slowed. But as Pichette said later, it's a very difficult economic environment and the company was happy with their EU performance.
Before analysts took over on the call, and in anticipation of the CPC storm, Google exec Susan Wojcicki said 20 changes had been made to the search algo to improve "ads quality" in Q3. This meant more ads were shown that users wanted to click - more clicks! She said "Sitelinks," which are in a prominent position on the search engine results page, saw an increase in clicks but a lower CPC. Sitelinks play out as product listing ads and saw "a lot of success" driving 600% better traffic to retailer sites, according to Wojcicki. Search driving display strategy!
Lower Search CPCs Driving Display
In part, Google has made a conscious decision to flood retailers with traffic. The more prominent Sitelinks are certainly a first step in the Google "circle of ads". Over time, those CPCs may go up as intender-thirsty retailers, who are loving the bottom-of-the-funnel search traffic, look to drive even more. Sitelink ads stand out.
On the other hand, maybe the search CPCs never go up and display CPMs increase. It's like Amazon buying your shipping for years and years. Google's buying your searches to gain display market share.Here's how...
Once the user clicks to the retailer's site, they're likely pixeled or cookied by the DoubleClick Ad Exchange - and poof! -users are now available for retargeting through the Exchange and courtesy of the AdSense network and your favorite DFP publisher. The algo change obviously benefits the ad exchange and even the Google reserve strategy (Mr. Search, full ahead! Drive traffic to display now!.).
Low search CPCs pump display CPMs - fed by retargeters looking for bottom-of-the-funnel intenders - through the ad exchange. Simply, more search clicks means more qualified display impressions - why wouldn't you if you're Google given the idea of brands moving online to capture shopper intent, and the resources of the DoubleClick Ad Exchange to capture intenders wherever they are across the AdSense ad network. Do I see happier publishers?
Back to the Call
Wojcicki called out success in audience buying and video and mobile. From Q3 to Q4, the number of advertisers doing interest-based advertising on the Google Display Network grew 60%. 15-45% of the skippable TruView video ads are viewed depending on the format.
And then Wall Street began its questions.. here are some highlights:
UBS' Brian Pitz began the analyst questions and asked about mobile usage during the holidays to which Nikesh Arora said it's "growing by leaps and bounds." So, no public, specific stats available. Pitz suggested that CPC's going down 8% was a surprise. Wojicki responded that the two biggest factors were FX or "user/advertiser positive changes" to search.
Citi's Mark Mahaney asked about YouTube growth vs. the overall display number. Pichette showed his poker face and said YouTube is "doing absolutely terrific." Page echoed this, but said that YouTube is still small compared to the overall opportunity in online video. Tell it like it is.
Macquarie's Ben Schachter asked about revenue growth beyond search on Android and mobile. CEO Page said its early days for monetization for mobile and that the Android app marketplace is doing well at this stage.
Pichette emphasized a year over year comparison of core O&O properties looks "very strong."
Heather Bellini of Goldman Sachs asked about CPC's, too. Wall Street's worried about clicks! Bellini asked about Q1 impact to which Pichette said FX is uncontrollable and Wojcicki reiterated that Google drove more clicks.
JP Morgan's Doug Anmuth wanted to know about the impact on CPCs. Wojcicki reiterated Q3 search ads quality changes and said there wasn't one big change that made the impact. TAC has gone up according to Anmuth for the first time, Pichette said it was just "partner mix."
Publicly, Google says the CPC decrease and paid clicks increase is occuring because it's ultimately good for the users.
Page reiterates late in the call that driving more clicks is a good thing across a number of factors. Were the ads useful? Wojcicki said it "shows our advertiser system is working."
Morgan Stanley's Scott Devitt asked about paid clicks, too! He noted Google's 34% growth in paid clicks and that advertisers are paying more for better distribution.
Herman Leung of Susquehanna Capital asked about headcount. 1100 people this past quarter were hired at Google - it's a slowdown from the previous year. Page said the previous year's headcount was at the "edge" of what was manageable. What's missing here is that they're swallowing lots of companies, too, like AdMeld - which is part of the integration and headcount challenge, too.
Hear the webcast of the earnings call here when it's available.
By John Ebbert