Google grows but hedges its bets on Q4

October 17, 2008
by Alex Hoye

There are a few key items that came out of the call that I believe go beyond the core earnings. Firstly, several comments from the executive team reveal that good old core search advertising is driving the resilience. As much as the exec team spent significant airtime touting Android, Chrome, maps programs and other glitzy toys, old school text links have won GOOG’s day today.

CEO Eric Schmidt noted, “Economic woes … lead consumers to use search engines more, as they evaluate shopping options and compare prices.” On the other side of the equation, companies are focusing on pure maximised impact of advertising spend, therefore moving spend to search advertising due to its concrete results and potential for ongoing analysis and improvement through a search agency. All in all it sounds pretty good for PPC.

A second notable was that the significant earnings win came in large part due to efficiency measures and not dramatic sales growth. Only 3% of the 31% annual growth came from Q3 over Q2. In fact, sales net of commissions actually missed analyst expectations. While Q3 earnings for the UK were $2m dollars higher, Q2 has one fewer day meaning the average daily revenue actually dropped.

Google management has slowed hiring, cut back on capex and - symbolic but true - in their famous free cafeterias they’ve cut meals from three entrees to two. Flat is the new precipitous growth and on drawing from our post from last Thursday, slow growth dominates in a crashing ad market. There is no doubt that online will be relative winners versus press, TV, outdoor and all traditional media. I hope you like those Tube posters you saw this morning, you’re going to be seeing the same ones for many months to come!

Third, Google chose the same day as the earnings call to announce a policy change enabling gaming companies to dig into search advertising (screen shot of our first client going live this morning below!). As we all know, by the time we announce a win in the last quarter, it’s time to think about how to hit the next target, and they reached into the cupboard and pulled out a sure-fire way to increase spend. It will also take a super-sized bite out of a key market that Yahoo and MSN were able to corner off as theirs until now. I was pleased to see Google run the call with an exec here in London, presumably to launch the initiative discussing working closely with their agency partners as key in launching these kinds of initiatives.

Finally, while online display advertising is taking a harder hit with some financial firms cutting spend, GOOG, like ourselves, find growth in the area to be critical for the future and have invested substantially in features to improve display performance. Watch this space, particularly as the IAB also measured strong growth in embedded display for H1 this year.

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