Google (GOOG) is having a weak quarter, Citi’s Mark Mahaney says. In fact, much weaker than Wall Street ostensibly thinks: Mark’s estimates call for a sequential drop of -7% in revenue versus the Street’s -2%.
But Mark is actually optimistic, because in some of that fun double-secret Wall Street speak, Wall Street actually thinks that Q1 will be weaker than Wall Street says it thinks.
More importantly, Mark chatted with a few search gurus this week. They said that spending in January and February blew but that spending in March has since bounced back. (We had heard about the February weakness. The March bounceback is news).
- Q1 Search Trends Call – We hosted a call on Q1 Search Trends with 4 leading Search Engine Marketing (SEM) firms, incl: 1) David Kidder, CEO of Clickable; 2) Dema Zlotin, SVP of Strategic Services at Covario; 3) Josh Styleman, Managing Partner at Reprise Media; & 4) Roger Barnette, CEO of SearchIgnite.
- Q1 Search Is Clearly Weak – Panelists noted that Q1 Search spend is materially weaker than Q4. Covario, with high exposure to High Tech/Electronics verticals, sees Search spend tracking down 20%-30% in January & February, materially weaker than Q1:08, when spend was down 3% Q/Q. Reprise Media sees a high-single digit Q/Q decline vs. a more typical range of mid- to high- single digit decline. (For context, GOOG reported 9% Q/Q growth in Q1:08 & we are modelling Q1:09 7% Q/Q decline – vs. Street down 2%.) Extrapolating to GOOG’s Q1 results is almost impossible, but our read keeps us cautious.
- …But March Showing Significant Positive Q1 Linearity… – While business was weak in January & February, all panelists noticed a “snap back” in March Search spend. Covario stated that March spend among clients was tracking up 29% M/M, meaning that full quarter Search spend could be down more like 15%-20% vs. the 20%-30% in Jan/Feb. SearchIgnite also pointed out that March was on track to be its biggest ever in terms of client Search spend.
- …And Q2 Is Expected To Be Up Sequentially – All panelists also agreed that they expect Q2 to be up vs. Q1. Covario expects Q2 to be up 10-15% vs. Q1. Search Ignite commented that Search client sentiment appeared to bottom in January/February. At the margin, this “relatively” positive Q2 outlook is consistent with the read from our March 17th call with international Search marketers (see 3/17 report). (For context, we and the Street are modelling 2% Q/Q revenue growth for Q2.) This expectation seems reasonable.
- CPCs & Conversions Down Y/Y; Paid Clicks Up – Panelists see Q1 CPCs (Cost Per Click) ranging from down low single digits to down 15% Y/Y. (We estimate GOOG’s CPC down 9% Y/Y.) Clickable is seeing conversion rates down 5%-7% Y/Y. Q1 Paid Clicks, however, appear robust, up 20% Y/Y per Reprise Media. (We are modelling 10% Y/Y GOOG Paid Click growth.)
- Reiterate Buy – Q1 will be weak, but we believe that positive Q1 linearity & a relatively better/less worse Q2 outlook reinforce the Buy, with a close-to-trough multiple (15X) on close-to-trough EPS ($20-$21) suggesting only 10% downside.
We don’t buy that 10% downside bit–no reason Google couldn’t go right back to $250–but if March is looking up, that’s certainly good news.