Got Ads?

1/31/2007

Google Q4 2006 Earnings Call

Very, very solid numbers from Google.

Google hit high end of expectations in Revenue: $2.234 billion.
Analysts consensus was $2.19 billion.
Google earned $3.29 per share on a GAAP basis.
Analysts expected earnings of $2.91.

Google's Numbers for the Quarter

Google's quarter looks good numerically, especially compared to Yahoo and MSFT

Revenue: $3.2B 67% Year-over-Year (YoY) growth
Revenue growth: 62% Google properties, 80% YoY
AdSense 37% of total revenue, 50% growth
Paid clicks data: Grew 61% YoY, 22% Quarter-over-Quarter

Revenue breakout:

$1.8B US, Retail vertical strong
$1.4B international, incl. favorable currency effects

Germany, France were strong. UK declined modestly as percent $469M - similar softness in travel & finance as was last year. Happy with growth pretty much world wide (no mention of Africa, though.)

TAC costs : declined slightly to 30.7% from Q3, but may increase with audio & video ads

$1.2B non-gaap operating profit, non-gaap operating margins 37% down from 38% in Q3.

CAPEX - "A favorite topic" - $367M for Q4, $1.9B for 2006 - mostly spent on IT infrastructure, datacenters, servers, networking equipment. Expect to make significant investments in 2007.

Operating Cash Flow (OCF) was $911M, Free Cash Flow (FCF) was $544M.

The Conference Call

A rather boring call (transcript here), really. Here's a handy guide to interpreting Eric Schmidt's prepared remarks: Eric likes to say "very, very good" when he means "good".

Eric Schmidt Says:	Really He Means:
Good	Not so hot.
Very good	OK
Very, very good	Good
Very, very, very good	Pretty good.

Most of the stuff this quarter fell into the Very, very good category. An example of very, very good was mobile search. YouTube was very, very pleasing. Merely good to very good was Google Checkout, although it's still early on that.

The prepared statements were bland. Mostly they are happy with the growth and dominance of their industry. Yahoo and Microsoft seem very, very, very far from their minds right now.

Eric: "Gaining share in almost every country"
Eric: What is the key to our success? "I think it's search"
Eric: "Showing fewer ads per search, much better quality, much higher monetization"
Sergey: Sees Google as: "Complete sales and marketing platform for all advertisers"

Jonathan Rosenberg brought up some interesting points in response to the first question about the revenue growth in paid clicks (22%) vs gross revenue growth (19%). Comparisons are hard, due to growth in clicks from international, which is less profitable than clicks in mature markets.

Need an index to compare CPCs from quarter to quarter
Newer markets have lower price, faster growth, lower avg CPC.
Google.com has higher CPC, growing faster (than non-Google properties)
AdSense for content adding social network traffic - downward pressure
Seasonal searches affect CPC - searches find more long-tail KW.

Did you notice that comment about MySpace? Social network clicks are obviously less profitable than search clicks, and Google is increasing their presence on social networks.

The Google Checkout promotion costs also counted against revenue from the search site, which dragged the gross down.

Another suprising point was Eric saying that mobile ads have better monetization per ad.

Eric: It's clear 2007 will be the year that mobile search query traffic. Advertising RPS is gonna be higher on mobile. Not material today. Still emerging. They are making significant investment around mobile.

The analysts had a lot of questions about YouTube. They were mostly deflected and ignored. However, one of the odd things was how Eric believes that content owners should submit their copyrighted works to Google, mainly because Google "knows who their fans are".

Odd, because, Google's basically saying: give us your content, your copyrighted properties, and we'll tell you how many people watched it. I'm not sure why large content producers would do that, but if Google can monetize it in new ways, and return more money back to the producers than other channels, I guess they will...

Most of the analysts don't ask good questions, and Eric moderates nicely, waving his hand and brushing them off. Here are a couple examples from my notes:

Q: Did YouTube cut deals before you bought them, how are those accounted for? What about the $50m in total amount for the payoff. Eric: Not gonna comment. Deals were accounted for in acquisition. YouTube doing a bunch of interesting deals. Next question.

Q: Asia performance questions. % of mix? YouTube vs Google video? Is Youtube the brand in video? A: We won't break Asia share out. Pay attention dammit! They want to keep the Youtube brand. Taking time to do integration to preserve value for both (YouTube and Google Video). Probably keep both brands as long as Larry's in charge.

Google Still Has Big Advertisers to Conquer

One interesting observation about Google's ability to keep growing came to mind as Omid Kordestani emphasized that "Google has 20% of the TOP 500 advertisers" in their display business. That means there is lebensraum for Google to grow.

In other words, the area that Yahoo is strongest in - brand advertising and big advertisers, is Google's weakest area. Eventually, Google will get serious about that. They seem to think they are already, but clearly it will really come together when all the initiatives across all channels (radio, tv, print, internet, search) start to work together.

In summary, Eric's closing remarks:

We are very, very, very pleased with what's going on with Google.

Labels: 2006, earnings, google, q4

¶ 1/31/2007

1/25/2007

Woeful Q4 For Microsoft

Not that you'd know reading the Microsoft earnings release, but MSFT had a weak quarter, posting it's lowest growth Q4 in ten years (according to GigaOM).

Profit in Q4 declined to $2.6B from $3.6B in Q4 2005.

MSFT was quick to blame Vista slippage, and point to deferral of $1.6B(!) in revenue as the reason for the weak quarter. Be that as it may, Microsoft has a few key structural issues - namely their businesses besides Windows, Servers and Office:

Online / MSN loses money
Xbox loses money ($300M last quarter on $3B in revenue)

Those are supposed to be the growth areas. At least in the conf calls, they do realize their complete and utter failure up to this point in search.

"On the search side you are correct we lost market share," Microsoft CFO Chris Liddell said in response to an analyst's question on the company's earnings conference call. He said he is "clearly not happy with that."

Not only is search share declining, but revenue per search (RPS) has GONE DOWN from what they used to get with Overture! In other words, their launch of adCenter has resulted in WORSE RPS than Yahoo's old Overture system. That's bad, especially since Yahoo has moved on to Panama, and expects improvements in RPS this year.

Microsoft's plight makes Yahoo look like Google in comparison...

Despite all the talk about "long-term investment", Microsoft has lost in search. They will never catch up. Google understood this phenomenon with YouTube, realizing they had to buy it, because Google Video would never be able to catch it with traffic growth. Search may not be as social or viral as YouTube, but it is self-reinforcing enough that with a 10% to 60% share difference Microsoft won't catch Google. BTW, search isn't over, but I am saying Microsoft has lost.

Seriously, if you ever want to be depressed about the nature of giant tech companies, just go read MiniMSFT and MSFTextrememakeover, both are insider blogs.

MiniMSFT covers the HR issues and management debacles, while MSFTextrememakeover is a bit more financial oriented - for example, you'll learn how Microsoft has lost around $5B on Xbox over the years..

Depressing.

Labels: 2006, microsoft, q4

¶ 1/25/2007

1/23/2007

Yahoo Q4 2006 Earnings

Yahoo announced earnings for Q4 2006 today. It was a mixed bag. Lackluster traffic growth of 15% in an otherwise strong environment is a bad sign, and Yahoo also lowered 2007 expectations.

Disappointing things:

Lowered guidance for 2007.
Weak 15% Year-over-year growth in traffic in Q4.
Rising TAC costs
Lowest Free Cash flow in several years.
Revenue per Unique User was 97 cents. Down 2% from Q4 2005.

Nice things:

Forecast a vague RPS improvement "in double digits". RPS is "revenue per search".
Ability to service large accounts is strong
Yahoo managed expectations well, and was able to beat analyst estimates by 3 cents.

However, net profit was $269M vs $683M for Q4 2005. Sue Decker explained Panama will drag on earnings until second half 2007. Their outlook incorporates expectation of "double digit" growth gains in Revenue per search (RPS).

Financial services were strong during the quarter despite Semel's warning in October that there would be weakness in Financial Services and Autos. Basically Semel had lowered the bar, and jumped over it.

In her CFO mode, Sue Decker constantly refers to "O and O" properties, "O n O" revenue. That means Yahoo "owned and operated" sites. They see that business growing 20%, but once affiliate sites are included, that growth nets down to 14%. That's kinda disappointing, especially since Yahoo's traffic acquisition costs (TAC) is going up (while Google's TAC cost has been going down a lot).

Semel monologued a bit at the end of the conf call Q&A, asking himself:

Q: Why did your re-org the company?

Audience side: Puts them close to best, most valued customers
Ad & Publisher side: all energies dedicated to reach advertisers on and off network, and get engineering teams together focused on same goal.
Lead transformation on how advertisers connect to their customers.

Translation: Everything in that Wired Article - "How Yahoo Blew It" was pretty accurate...

Search Marketing Tidbits Gleaned From Q4 Conf Call

ComScore Playing Catch-up

Traffic growth was disappointing, but comScore numbers make it look better. From the CNN earnings article:

"And according to figures from Nielsen//NetRatings that were released Tuesday, Yahoo's search engine volume in December increased 30 percent from a year ago, a faster growth rate than Google, which posted a 22.6 percent increase."

Sue Decker said comScore's estimates were low a year ago, and have caught up this year. So comScores usage growth numbers look better than Yahoo's internals.

New Ranking Algorithm Coming

Yahoo announced that on Feb 5 there will be a new search ranking model in Panama. This probably means that clicks will get more expensive at that time, or at least be more fairly priced. (TRANSLATION: there are some cheap clicks out there right now, and they are mixing old / new system ads with lower efficiency).

Emphasis on Improving Network Quality

Components to quality improvement :

Address lower performing affiliates - read: Overture feed arbitrage sites
Controls that manage geographic leads
Great news for "higher quality publisher"
Acquire higher quality network publishers: eg. Ebay, newspapers deals.
Drive network quality higher

There was a clear focus on affiliates as a problem point on network quality. Obviously this includes all the ad arbitrage sites in the Yahoo Network which have an Overture ad feed. Sue Decker sounds like she's coming after those. We'll see how real that is...

Kedrosky points to a WSJ article detailing the painful road to Panama - and reporter Kevin Delaney basically pans Panama...

Later in the week, I'll post on my experiences with Panama. It's also a mixed bag.

UPDATE: Looking at Techmeme, the meme on the Yahoo announcement seems to be that the Panama rollout is happening faster that planned - and that's a good thing.

I find this interpretation quite odd, considering that Yahoo has been pointing to the Panama rollout since Q4 2005, even holding a special analyst day on May 17 2006 to talk about Panama to reporters. Beyond all this, Panama is 2 YEARS LATE!. So it's impressive if Yahoo can spin this rollout as happening earlier than expected.

I thought Sue Decker was pretty clear on this point when she:

said they are LOWERING guidance for the rest of 2007
said Panama wouldn't be a positive effect til LATE Q2
vaguely waved her hands on an eventual 'double digit increase' on RPS that could mean anywhere from 10% to 99%.

At least Henry Blodget noticed the real news of the announcement: Turtle-like revenue growth... Sigh.

Labels: 2006, decker, q4, semel, yahoo

¶ 1/23/2007

12/21/2006

Predictions Recap

Here's one of those canonical end-of-year posts: How'd I do at my predictions for 2006.

Here's what I said last year in a post where I was trying to predict the major event for each of the upcoming 6 months:

January: Google Calendar releases. Integrates with Gmail by sucking dates out of your mail and into your calendar.

Good. 1 for 1.

February: Google Wallet or "Cash by Google" gets pushed out. Designed mainly to let you buy stuff from Froogle vendors.

OK. 2 for 2 - Google Checkout.

March: Google buys a music startup like Pandora.

Totally Wrong. They bought You Tube instead. 2 for 3.

April: Yahoo releases revamped Y! SMS (aka Overture) so the auction model works like Google, based on relevance. MSN takes away a bunch of inventory from Yahoo (i.e. MSN itself).

Totally wrong on Yahoo's time frame. MSN of course did take the inventory, and managed to decrease it as well. 2 for 4.