Home Online Advertising Google’s Bad Day: Accidental Early Earnings Release Shows Falling CPCs

Google’s Bad Day: Accidental Early Earnings Release Shows Falling CPCs


For the past few years, Google’s quarterly earnings have tended to be a day of celebration for the search giant. But its Q3 report, which was released a few hours before the company intended, contained some slight signs of weakness as profits and revenues missed analysts’ bullish forecasts. Read the earnings release. The misfired earnings release resulted in Google’s stock plunging 9 percent before trading was halted by the SEC in early Thursday afternoon.

Expectations aside, Google’s results were largely positive. Revenue was up 45 percent from Q311, with Google’s site revenues rising 19 percent over last year’s period and its partner sites dollars growing 15 percent. Google’s owned and operated sites, which includes YouTube, comprised 67 percent of the company’s total sales, while its site network made up 27 percent in Q3.

One negative area was cost-per-clicks, which fell 15 percent from last year’s Q3 and decreased 3 percent from Q2 2012. A second tough spot for Google was managing expenses around customer acquisition. Traffic acquisition costs claimed 26 percent of the ad dollars Google shares with its network partners, up slightly from last year’s 24 percent.

“We think the continued decline in CPCs is due to the impact of Ads Quality changes as well as due to increased Mobile queries,” said Citi analyst Mark Mahaney, in a research note. Ultimately, Mahaney characterized Google’s core results as “generally in-line to a tad-shy vs. expectations,” and that nothing he’s seen in the Q3 earnings was “thesis-changing.”

JP Morgan analyst Doug Anmuth echoed Mahaney’s view of Google’s Q3 financial performance.

“While still light overall, Google numbers are not as bad as they initially appeared,” Anmuth said in an analyst note. “We believe a substantial portion of the core Google gross revenue shortfall was due to greater than expected FX and hedging impact. Core Google margins were light, though at least part of that is likely attributable to higher than expected Nexus 7 tablet sales. We would expect Google shares to regain some ground once they begin trading again and we’d be taking advantage of the sharp sell-off.”

In essence, Google appeared to miss 3Q earnings on the revenue and EPS lines, “but a closer look suggests problems seem related to Motorola,” said Jefferies analysts Brian Pitz  and Brian Fitzgerald. “Google core search seems healthy, with O&O and Network revenue roughly in-line with expectations. Paid Click and CPC growth were roughly in-line with our estimates.”

With all that in mind, Google is still the dominant online ad player. As eMarketer noted, Google now holds more share than any other company in each of the U.S. online, search, display and mobile advertising markets. Google’s ad revenue alone is expected to account for 41.3% of total US digital ad revenues in 2012, eMarketer projects.

Google is the display leader, having displaced Yahoo in that spot last year, with 15.4 percent share of that segment’s market, according to eMarketer. Facebook, by comparison, will earn $2.16 billion and maintain a 14.4 percent portion of  the U.S. display market this year, up 24.4 percent from $1.73 billion in 2011. The overall US display ad market will grow 21.5 percent to $14.98 billion from $12.33 billion in 2011, eMarketer estimates.

Google also dominates the overall U.S. mobile ad market — which eMarketer estimates will reach $2.61 billion in 2012 — with a 54.5 percent share of net revenues projected for this year, dropping slightly to 54.1 percent by 2014 as more competitors enter the market. Much of Google’s dominance of the overall mobile market is a result of the company’s strong position in the mobile search ad market, of which eMarketer figures Google holds a 95.4 percent share of revenues.


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In terms of reaction, by mid-afternoon, executives were cautioning against a rush to judgment. After all, a bad day for Google would be a hugely remunerative one for even the most successful companies.

Roger Barnette, president of IgnitionOne, which was one of the first ad tech firms to say it would immediately integrate the new Google Shopping results into its own remarketing channels last month, told AdExchanger that expectations were high for Google and “stocks had risen already to meet those expectations – what we are seeing today in my opinion is a correction and nothing of long-term concern.”

According to IgnitionOne data, Google’s search advertising side was flat compared to the second quarter overall. “But we still saw a YoY increase of 13 percent in spend in paid search on Google and 17.8 percent for all search,” Barnette said in an email. “We expect the fourth quarter to be much stronger as we have seen an increased efforts in paid search across our client base and the holiday buying season will quickly make Product Listing Ads a real revenue driver for Google.”

Updated: What started out as a tough day got easier once Google began its analysts call (it started on time, for the record). Google CEO Larry Page said that Google’s run rate from mobile is $8 billion up from $2.5 billion. The vast upswing reflected that last year was only advertising dollars. and these days, apps are contributing significantly.

Nikesh Arora, SVP/chief business officer, picked up the baton and noted that the company would be working on creating more seamless advertising opportunities that bring together the PC, mobile and TV screens.

During the Q&A portion, CFO Patrick Pichette picked apart the CPC declines. “People have a tendency to harp on mobile. But we have such a huge international mix that needs to be taken into account. If you look at the number, you’ll see our network grew, for one thing. And we haven’t even talked about our ad quality and the effect that has on traffic acquisition. At the end, for us, what really matters is that our paid clicks are going up — 33 percent this quarter — and the fact that there is a little less CPC is not a concern.”

JP Morgan’s Anmuth asked Page about Google’s focus on mobile and whether, as the smartphone space becomes more oriented around apps, as opposed to the mobile web, the search giant is in danger of seeing search usage diminish. “We’re not worried about that, since there are great experiences that are better within apps and some that will continue to be great with the mobile web,” Page said.

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