Google Revenues Rise, But Promises Less Emphasis On Ads, More Focus On Hardware

Nikesh Arora, GoogleGoogle turned in another reliably strong quarter in Q3, as revenues were up 12% over the previous year. But despite its status as a display ad leader battling it out with Facebook for dominance of the space, network revenues made up a smaller share of the search giant’s total sales. Read the earnings release.

The change could be part of the reason Nikesh Arora, SVP and chief business officer, told investors during the call that the company would expect to realize more revenues from hardware, such as its recently rolled out Chromecast and Chromebooks products.

On a side note, CEO Larry Page, who has been afflicted with damaged vocal cords for years, said that he would no longer appear on the earnings calls, saying that he wanted to concentrate on other priorities associated with running the business.

Some highlights from Google’s Q3 results:

  • Google segment revenues were $13.77 billion, or 92% of consolidated revenues, in the third quarter of 2013, a 19% increase over third-quarter revenues of $11.53 billion in 2012 .
  • Google-owned sites, which include YouTube, brought in $9.39 billion for a gain of 22%. As a slice of the segment revenues pie, the O&O dollars made up 68% of total Google segment revenues — roughly the same share it represented last year at this time.
  • Google’s partner sites generated segment revenues of $3.15 billion, or 23%  during the period. In Q3 2012, that share was 27%.
  • For more Wall Street, the big quarterly numbers to zero in on is how much Google’s search business, though still the most powerful money making engine on the internet, is nevertheless slowing. Paid clicks on ads served on Google sites and across its network rose a strong 26%. But the problem can be seen in the cost per click ads which fell once again by 8%. Analysts fear that although Google’s display business is robust, the margins are not nearly as favorable as search, since it is much less expensive to run.
  • Not surprisingly, Google’s Display business is still growing more rapidly than search, says Cantor analyst Youssef Squali, adding that his firm estimates that segment has a $7-plus billion run rate for for this fiscal year.
  • Much of Google’s display strength is coming from YouTube and the site’s growth is tied to the rise of video advertising in general. Also, those gains have fueled Google’s optimism that it can capture TV ad dollars, not just the print budgets that have largely migrated to the Web. YouTube-branded video ads were growing more than 75%, Arora said.
  • After video, mobile is naturally Google’s other big focus these days. About 40% of YouTube’s traffic is now being generated portable devices, compared to 6% two years ago.
  • Other revenues from the Google segment were $1.23 billion, or 9% of total Google segment revenues, in the third quarter of 2013. This represents an 85% increase over last year’s third-quarter revenues of $666 million.

Vague Enhancements: Analysts pressed Google executives on how the company is growing its “Enhanced Campaigns” cross-device AdWords program, what it was doing about the expectation of the industry’s diminishing reliance on cookies and whether YouTube would take more ad revenue from TV buyers as talks persist about the video site streaming NFL games.

Arora was fairly vague, saying that many of these areas are either speculative or “still too early to discuss.” Later on, he told JP Morgan analyst Doug Anmuth the company does not break out numbers for Enhanced Campaigns because “it’s about the whole” AdWords system.

“Clients tell us they like the new system and that they are adjusting their campaigns and keywords while developing their multiscreen bidding strategies,” Arora said earlier when speaking on the topic. “For example, we’re seeing advertisers bidding more frequently in mobile keywords because Enhanced Campaigns makes it more easy to do so. Discover Card is one example of a company that has increased their mobile spend with us.”

Cookie alternatives?: On the issue of cookies, Baird Research’s Colin Sebastian asked if Google was working on clear alternatives and if so, what were they.

“We believe that technological enhancements can improve user security,” Arora said, addressing the issue of cookies from a privacy perspective. “And we want to make sure the Web remains economically viable as we make that transition. We have a lot of concepts in this area, but it’s very early to talk about what will work and what won’t.”

TV offline to video online: Goldman Sachs Heather Bellini noted that advertisers have a broad choice in platforms to pick from and wondered if Google expects to see more offline TV dollars move to the Web generally and mobile specifically. Furthermore, how Google would differentiate itself to capture those budgets, she asked.

“We’ve  always seen a lot of choices for advertisers and always competed well in that market,” Page said. “I think people are getting more excited about the prospect of moving dollars online. For us, the measurability and strength of the tools available provide a tremendous opportunity that people are realizing more and more.”

Since there are more players in the online ad market working towards the goal of bringing more dollars to digital, it’s going to happen at an accelerated rate, Arora added. “In particular, as I mentioned with respect to YouTube, we’re going to see more videos online and that will also drive more offline dollars to the Web and mobile. In terms of our differentiation, what we’ve done over the last few years is worked to provide a comprehensive, quality ad solutions across display, search, mobile. Couple that with measurement, it makes us and online more compelling.”

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