Google met revenue estimates and blew away EPS. Some hair on the quarter, but obviously miles from the disaster some had feared. Eric reiterated the company has not seen any macro-economic impact. Stock up $75 in aftermarket.
Gross revenue exactly in line with consensus–$5.2 billion, up 42%. Net revenue $3.7 billion, slightly ahead of consensus. Non-GAAP EPS of $4.84 blew away consensus of $4.52.
The US business did decelerate materially: from 40% in Q4 to 30% in Q1–far from a disaster, but enough to justify some of the mid-quarter concern (If estimates hadn’t come down, Google would have missed them). Paid clicks also continued rapid deceleration, from 45% in Q3 to 30% in Q4 to 20% this quarter. Free cash flow dropped sequentially on shockingly high capital expenditures of $842 million (where on earth is this money going?) If Google ever starts to really rein in CAPEX, the stock should soar.
Doubleclick only contributed to two weeks of the quarter: immaterial to revenue and slightly dilutive to earnings. Google talked a lot more about the display opportunity: It intends to rapidly become the biggest display platform in the world. That said, the company still appears reluctant to put display ads on its own Google.com property (which would be an immediate, huge boost to bottom line).
Bottom line: Deceleration continues, which will keep a lid on multiple expansion. Stock will likely settle in around 25X-30X free cash flow. From a high level, though, the company’s performance remains nothing short of extraordinary.
CONFERENCE CALL NOTES
Eric: Strong quarter, well-positioned regardless of business environment. Ads showing transformative effects. Paid click growth higher than had been speculated by third parties. (Gets the dig in early). Quality improving. Fewer but much better ads. More and more flexibility control in hands of advertisers. DoubleClick has been added, allows much more comprehensive solution.
Apps: Working to build out whole new online experience. Salesforce allows integration for enterprise.
George: Results include DoubleClick. Immaterial to revenue and slightly dilutive…
Paid clicks… up 20% y/y. “On google.com in US remains healthy” (ie., COMSCORE IS FULL OF IT). International also strong.
Google’s own hiring has slowed dramatically: 800 in Q1. 10% of DoubleClick laid off in early April. Another 15% expected to leave. These headcount reductions apply only to US and don’t include divestitures. So far, no headcount reductions intl.
Operating margin increased sequentially, which reverses trend. This is good signs.
$842 million CAPEX. IT infrastructure, data centre, networking equipment. This is shockingly high. Free cash flow nearly $1 billion, but down sequentially. When will Google finally be able to scale back CAPEX?
Sergey: Huge improvements in search. Yawn.
Larry: Ads and applications. AdSense improvements. Yawn. AdWords: conversion optimizer….customer conversion rather than clicks. Analytics: added industry benchmarking.
YouTube: 10 hours of video uploaded every minute. In-video ads great adoption, customers increasing size. Also launched Adsense for video…perform well, much better than banner ads.
DoubleClick...we’re working on combining ad networks. Huge opportunities there.
Apps: Google Sites, offline docs–allows folks to run offline. Very excited about Salesforce partnership…integrated, seamless.
Culture: Fortune’s best place to work two years in a row.
CFO search: George still here. No offers yet. Good candidates.
DoubleClick: What going to do? Omid’s answer largely content free. Integrating YouTube into the network.
We will become world’s largest display publisher. 90% of our pages can handle display ads. [THIS IS BIG STATEMENT]. Can integrate video, search, display, Feedburner, etc.
Display model–on your own pages? YouTube, yes. Haven’t made decision on other sites. No specific plans. We’re making progress in our network. Jonathan: Now that have DoubleClick, we can integrate DART for advertisers…
MACRO ECONOMY IMPACT: Eric: We have looked at it really carefully, and we do not see an impact at this time. Also looked at what would happen…we think we’re well-positioned. Does well in most scenarios.
Quality improvements: Fewer hit quarter than usual, because more of them came late in quarter. Biggest ones are the landing page quality improvements. Also some policy changes: Users always know where they end up when clicking. Automatic matching beta test…that is relatively modest. We often don’t know improvement very short term.
Mobile Search: Anecdotally… In high-end markets like Japan, mobile search and ads work very well. Nothing to dissuade that it’s worse than desktop. In US and Europe…will increasingly see greater volume, usage, and conversion. Big challenge: screens small. But have much more relevant and timely info–location, etc.
Paid Clicks–Still Lots of deceleration: We look at this as a quality issue. If we improve quality, aggregate clicks will grow (as will price). Model of staying focused on quality will work. [AGREE WHOLEHEARTEDLY]
Seasonality: Eric says hard to say it’s changing. There is a seasonality, hard to know exactly where it is. Q2 and Q3 usually weak. Jonathan: There are things that make each year different…Leap Year made this quarter 1% bigger, etc. Also highly dependent on share: When we have high share, it looks more seasonal than in past.
Social Networking monetization–any progress?: Applying lots of new technologies. I’m optimistic, but this is balanced against tremendous inventory levels.
Yahoo test: Nice to be working with Yahoo. We like them very much. (Awesome non-answer)
Any ad sectors weak? We tend to see…clicks do grow less rapidly in sensitive areas, but all still showing healthy growth in ad revenue. In UK clicking higher on travel. In US, even foreclosures do pretty well… In general, we are seeing absolute growth even in sensitive areas [AMAZING]. Possible prices go up.
China: Things going well. Seeing good marketshare growth. Market so large that numbers huge. Significant new products: Chinese knowledge, users, search, etc.
Big advertisers vs. small–which grew faster in US?: Larger customers are the bigger drivers… the analytic tools get adopted by the larger ones. As advertisers adopt, it fuels growth.
YouTube ads: What are barriers to runings ads on user-gen content: Working with YouTube management. Streamlining DoubleClick integration. How do we work with users…much better targeting of ads, promotions. 2008 plan…specific milestones.
Display vs text: Trying to set up auction so they have to compete with each other.
US revenues grew $29mm sequentially… without Dclick, FLAT. Far lower than in past. Is this where we are in search cycle? We know that it’s not macroeconomic. Timing of deals, product rollouts, maturity of US market. Have to be very careful with year over year… Base quarter last year, we added lots of big partners to AdSense. Relative to last year, we didn’t have that many. That’s what makes it look like a reduction in the US. Also the AdSense for domains clean-up. Eric: Those two are the primary cause.
We won’t rehash the full debate, but here are the highlights. In Q1, the market has seen:
- Violent slowdown in US paid click growth, per Comscore: From 25% year-over-year in Q4 to 2% year-over-year in Q1.
- Some anecdotal reports of weak US spending on Google in Q1 offset by many reports of strong US spending (conflicting data points)
- Major cuts in analyst estimates for Q1 and full-year 2008
- A 30% drop in the stock, from $650 to $450.
We know Google is intentionally reducing “accidental clicks” to improve ROIs for advertisers. We also know that, as late as early March, Eric Schmidt said the company still hadn’t seen any impact from the weakening economy. The bulls argue that the company’s click- quality improvement programs will lead to higher prices-per-click for the remaining clicks, thus offsetting the loss of revenue units. The bears argue that price increases can’t possibly offset the drastic slowdown and that Google will see a sharp deceleration in US revenue in Q1.
Google generates about half of its revenue from the US, so if the US slowdown is significant, international would have to be extremely strong to offset it. Consensus estimates have dropped significantly since the start of the quarter, however, so the bar is considerably lower than it was three months ago.
We have modelled the quarter in detail, and we believe the company could survive a slowdown in the US business to about 25% Y/Y versus 40% in Q4 (and reported paid-click growth in Q1 of 2%). Any more of a slowdown, and Google will probably miss the current revenue consensus. (The EPS consensus is easier: Unless Google has continued to increase spending in the face of a sharp revenue slowdown, the company should easily beat EPS consensus).
- Gross Revenue: $5.2 billion consensus, up 41%
- Net Revenue: $3.1 billion consensus, up 42% (deceleration from 52% in Q4)
- EPS: $4.52 (Should be plenty of upside here, unless company really blows it)
- Consensus Outlook: June Q: $3.8 billion Revenue / $4.64 EPS 2008: $15.9 billion / $19.55 2009: $20.2 billion / $24.09
- June Q: $3.8 billion Revenue / $4.64 EPS
- 2008: $15.9 billion / $19.55
- 2009: $20.2 billion / $24.09
SAI Spreadsheet: Google Financial Analysis
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