The online ad market will remain in the doldrums, investors concluded after Google (GOOG) reported second-quarter earnings.
Results released July 16 showed a big drop in so-called revenue per click, a measure of the value placed by marketers on ads shown by Google, and more generally a barometer of the health of online advertising. The average amount paid by advertisers when a Web user clicks on an ad placed by Google dropped 13% in the period that ended June 30. The decline in revenue per click overshadowed other results, including sales that bested Wall Street's expectations by a hair and better-than-expected earnings that showed Google is keeping costs under control.
Shares of Google fell 3.4% in extended trading after closing July 16 up 4.43, or 1%, at 442.60. "The downturn is finally getting to Google," says Jeffrey Lindsay, a senior analyst at Sanford C. Bernstein who has an outperform rating on Google's stock. The drop in revenue per click shows that Web users are clicking on ads to comparison-shop without buying products, and buying lower-cost items online compared with a year ago, Lindsay says. Those behaviors mean ads are less valuable to marketers, and result in lower payments to Google.
Beating Wall Street Expectations
Now, investors will be watching the results of other Internet companies to see whether the online ad market can pull out of the slump that's left search marketing spending 20% lower in each of the first two quarters of 2009. Analysts fret Google's results portend weakness in pictorial and video display ads, which tend to be less effective and therefore less valuable than ads placed alongside search results. Falling demand for display ads bodes ill for Yahoo (YHOO), scheduled to report second-quarter earnings on July 21. "If paid search catches a cold, then display will probably get pneumonia," Bernstein's Lindsay says.
Revenue at Google slightly beat Wall Street analysts' expectations, increasing 3%, to $5.52 billion. After subtracting payments Google made to other Web sites that host its ads, revenue was $4.07 billion, vs. analysts' consensus estimate of $4.06 billion. Net income was $1.48 billion, up 19% from $1.25 billion a year ago. Google earned $4.66 per share, or $5.36 after removing the cost of stock compensation for employees. Wall Street had expected earnings of $5.09.
Chief Executive Eric Schmidt said on a conference call with analysts that the results show that "Google's business appears to have stabilized.…A quarter ago, we had no idea where the bottom was." He credited "careful cost controls" with helping profitability—Google's workforce declined by 375 employees by the end of the second quarter compared with three months earlier. That was the third consecutive quarterly decline in Google's staff size.
Questions About YouTube
Stability aside, Schmidt added that "it's too early for us to tell when the recovery will materialize." He added that the company is "very well-positioned for the future." Indeed, analysts say the company's emphasis on selling ads through an automated bidding system—rather than, say, lengthy negotiations with advertisers—will help Google benefit quickly from an eventual comeback.
Results released July 16 showed a big drop in so-called revenue per click, a measure of the value placed by marketers on ads shown by Google, and more generally a barometer of the health of online advertising. The average amount paid by advertisers when a Web user clicks on an ad placed by Google dropped 13% in the period that ended June 30. The decline in revenue per click overshadowed other results, including sales that bested Wall Street's expectations by a hair and better-than-expected earnings that showed Google is keeping costs under control.
Shares of Google fell 3.4% in extended trading after closing July 16 up 4.43, or 1%, at 442.60. "The downturn is finally getting to Google," says Jeffrey Lindsay, a senior analyst at Sanford C. Bernstein who has an outperform rating on Google's stock. The drop in revenue per click shows that Web users are clicking on ads to comparison-shop without buying products, and buying lower-cost items online compared with a year ago, Lindsay says. Those behaviors mean ads are less valuable to marketers, and result in lower payments to Google.
Beating Wall Street Expectations
Now, investors will be watching the results of other Internet companies to see whether the online ad market can pull out of the slump that's left search marketing spending 20% lower in each of the first two quarters of 2009. Analysts fret Google's results portend weakness in pictorial and video display ads, which tend to be less effective and therefore less valuable than ads placed alongside search results. Falling demand for display ads bodes ill for Yahoo (YHOO), scheduled to report second-quarter earnings on July 21. "If paid search catches a cold, then display will probably get pneumonia," Bernstein's Lindsay says.
Revenue at Google slightly beat Wall Street analysts' expectations, increasing 3%, to $5.52 billion. After subtracting payments Google made to other Web sites that host its ads, revenue was $4.07 billion, vs. analysts' consensus estimate of $4.06 billion. Net income was $1.48 billion, up 19% from $1.25 billion a year ago. Google earned $4.66 per share, or $5.36 after removing the cost of stock compensation for employees. Wall Street had expected earnings of $5.09.
Chief Executive Eric Schmidt said on a conference call with analysts that the results show that "Google's business appears to have stabilized.…A quarter ago, we had no idea where the bottom was." He credited "careful cost controls" with helping profitability—Google's workforce declined by 375 employees by the end of the second quarter compared with three months earlier. That was the third consecutive quarterly decline in Google's staff size.
Questions About YouTube
Stability aside, Schmidt added that "it's too early for us to tell when the recovery will materialize." He added that the company is "very well-positioned for the future." Indeed, analysts say the company's emphasis on selling ads through an automated bidding system—rather than, say, lengthy negotiations with advertisers—will help Google benefit quickly from an eventual comeback.
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