Google Sucking Wind In Europe, Estimates Cut


Collins Stewart analyst Sandeep Aggarwal cuts his Google (GOOG) estimates based on anecdotes of weakness at the London Search Engine Strategies conference.  We expect to see Google estimates continue to come down as analysts realise that the company will be hard pressed to grow revenue 11% in 2009 and 17% in 2010, as per current consensus.

(What, exactly, explains that acceleration in 2010? By then, the search product cycle will be even more geriatric. Can’t be another big product, because Google doesn’t have any. Must be global economic recovery, we guess.)

Sandeep’s notes and our annotations (in blue) below.

We are cutting our est for GOOG, primarily due to increasing concerns of softness in CPC [revenue per click] that we believe is now becoming more pronounced trend in Europe as well (a key negative takeaway from our visit to SES conf London last week) and in our view global coverage ratio reaching on the tail-end of Google’s recalibration efforts [translation: Google’s increase in the number of search results pages that have paid links is flattening]…

¡       Negative European trends impacting GOOG?

Not all the current trends in paid search in Europe are negative but the most negative trend is the softening of CPC that we picked during our last week visit to London to attend Search Engine Strategies (please see our industry note on SES London takeaways). The weak verticals in Europe are: Financial Services, Retail, Auto, Real Estate and Jobs. 

[Offsetting this somewhat is] incremental rev in Q1-09 as it recently lifted a ban from gambling related keywords in Europe (unlike US, gambling is a major online category in Europe ). The verticals that are still holding strong in Europe are: Travel, Healthcare, and Software. Finally, in our view, Search adoption in Eastern Europe is taking place at a much faster pace supporting stronger queries growth internationally (albeit lower base).

¡       Coverage ratio on the tail-end of Google’s recalibration efforts.

After two years of proactive move by Google to reduce coverage ratio (down from late-to-mid 50s to late 40s in our view), we started hearing from our industry contacts in Q3-08 that Google started re-expanding its coverage ratio. Though Google can make changes to coverage ratio anytime, in our view coverage ratio has perhaps already re-entered into early 50s level.

And here are Sandeep’s notes from London SES:

Summary: Last week we attended the Search Engine Strategies conf in London , UK focusing on European search marketing and online ad trends. Perhaps the largest search industry conf in Europe , it was attended by nearly 1,400 people. We had a chance to interact with dozens of SEM & SEO agencies, advertisers, leading Internet companies, and other constituents of the online advertising ecosystem in Europe . We came incrementally negative due to mixed search/ad trends in Europe .

¡       Our key takeaways from this three-day conference include:

1. Cost per click softening in Europe . Perhaps the single biggest negative trend for Europe is the softness of CPC for search keywords.

2. Google will benefit from incremental revenue in Q1-09 in Europe as it lifted its ban on gambling related keywords in Europe .

3. Increasing concerns about weak economy clearly visible along with softening online ad spend trends.

4. Secular growth trends still there (and search queries growing reasonably fast) as ad budgets continue moving online.

5. Eastern Europe is seeing search adoption faster than Western Europe .

6. Google content ad network growing very fast. It seems lately Google has made its content network more transparent along with enhancements increasing the overall satisfaction level and CTRs for advertisers.

7. Social networks may pose threats to Google and other search engines. Many SEM agencies now diverting search budgets to social networks. [Relax.  Based on the US experience, there’s nothing to worry about.]

8. Affiliate marketing, along with social networks, claiming a share of wallet for search spend in Europe .

9. Focus on SEO [organic search results] is unprecedentedly high due to last year’s steep jump in CPC, weak economy, and slightly higher maturation of search.

11. Online video search emerging as a big category but still limited in money making opportunities. Online video is now becoming part of the overall online ad portfolio for many agencies and advertisers.

12. Yahoo! continues to suffer from bad quality partners.

13. Display advertising in Europe is hammered more than search. Many agencies and advertisers told us that display ad spend in Europe is softening at much faster pace than search. [Nothing new there]

14. Four verticals still holding very strong online in Europe are: Travel, Healthcare, Software, and Gambling. Worst affected are: Financial Services, Retail, Real Estate, Jobs, and Auto.

15. Mobile Internet is a BIG emerging theme. [Yawn.  It’s a big emerging theme everywhere.  And it still doesn’t generate any revenue.]