Google’s weak quarter was eclipsed by the Microsoft-Yahoo news. After some of Google’s comments about the quarter on the conference call, however–and its later public statements about Microsoft–Google has the makings of a new credibility and image problem.
Q3 Revenue Shortfall Explanation
Google’s revenue decelerated sharply in Q4 as a result of a deceleration in paid clicks (Google’s primary revenue unit). Impressive price increases (revenue per click) kept the quarter close to expectations, but momentum investors generally focus on unit growth, not price increases, so it’s likely that the stock’s multiple compression will stick.
Google’s explanation for the click deceleration, moreover, didn’t make sense. CFO George Reyes attributed some of the weakness to an AdSense quality-improvement program and some to an unusually strong third quarter:
- The AdSense change, in which the company tweaked AdSense to reduce “unintentional clicks,” may have contributed to the click deceleration, but it did not cause the revenue shortfall. The company’s AdSense revenue (which is included in the Google Networks line) met expectations. It was Google’s owned and operated revenue that fell short. It’s possible most of the click deceleration came from the AdSense change, but if that’s the case, then the pricing improvements on Google Sites were not as impressive as analysts thought.
- The third quarter may have been modestly “unusually strong,” but it wasn’t a wacky aberration. In the past five quarters, Google’s year-over-year click growth has decelerated as follows:Q406: 61% Q107: 52%Q207: 47%Q307: 45%Q407: 30%
- Q406: 61% Q107: 52%Q207: 47%Q307: 45%Q407: 30%
- Q406: 61%
- Q107: 52%
- Q207: 47%
- Q307: 45%
- Q407: 30%
If we ignore Q3’s 45% growth and assume a trend-line deceleration from the first three quarters, this would have put Q4 click growth in the high 30%-range–still well ahead of the 30% actual performance.
Adding fuel to the credibility question, George said on the call that Google’s click growth in Q4 exceeded the company’s internal expectations. If this is the case, it begs the question why Google’s internal expectations were so low. Was there a one-time boost in Q2 and Q3 that the company knew would no longer apply in Q4? We continue to think that the company’s “no guidance” policy is wise, but comments like this won’t create warm feelings of investor goodwill. (Because they effectively boil down to “Look, we knew the quarter was going to be weak–it’s you idiots who were expecting too much.)
Google also wasted no time in lambasting Microsoft’s bid for Yahoo as yet another world-domination move by an innovation-killing monopolist. Such rhetoric might have resonated in the late 1990s, when it still seemed that Microsoft might actually make some headway online, but it’s now ludicrous. Especially coming from a $17 billion behemoth that most people refer to as “the next Microsoft.”
The transition from feisty, nimble underdog to heavyweight incumbent is one that many great companies struggle with. Google has made great strides from a communications perspective over the past two years, but it’s clear from statements like this one that the company still does not quite appreciate how it is perceived these days.
It’s obviously understandable that Google would want to do everything it can to paralyze Microsoft for as long as possible–especially given the awesome effort Microsoft has made to bog down the DoubleClick deal. But Google has to be very careful how it expresses itself during this fight.
Google is now perceived as “The Next Microsoft” in more ways than one. Google may not intentionally be exterminating competition with the same zeal that Microsoft once did, but it turns out that search is a natural monopoly. And Google’s lifeline to Yahoo (in the form of an Eric Schmidt call to Jerry Yang) resembled not so much a gesture of Valley solidarity as a heavyweight wrestler momentarily taking his foot off a prostrate rival’s throat. So it’s no surprise that the most common reaction to Friday’s anti-Microsoft screed was “Isn’t this rich–the pot calling the kettle black.”
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