On July 18, 2013, Google surprised investors with second-quarter results that fell short of expectations thanks partly to a continued drop in ad prices, pushing its shares down 5% in after-hours trading.
Revenues and Earnings Fail To Meet Wall Street Expectations
The search giant reported a profit of $9.56 a share before stock compensation and Motorola restructuring charges, considerably below analysts’ estimates of $10.78 a share. Revenues rose 19%, to $14.1 billion–just a little under estimates of $14.4 billion, but apparently enough, along with the profit shortfall, to raise concerns among investors. Second-quarter earnings last year were $10.12 a share on $9.61 billion in gross revenues.
Share Prices Take A Hit
Google’s shares had fallen nearly 1% to $910.79 in trading on July 18 before the earnings announcement. Shares hit a record-high $924.69 Monday, up from a recent low of $766 in mid-April. Some analysts already had raised their price targets to $1,000 or more.
The main culprit is dropping mobile search ad prices, which already are at least 40% lower than prices for ads served to desktop computers. Ad prices overall in the quarter fell 6%, more than the 3% analysts expected and the 4% drop in the first quarter. One factor may be that Google is opening up much more mobile ad inventory, which could serve to reduce prices until more advertisers move to reach people while they’re on smartphones and tablets, according to Larry Kim, founder and chief technology officer for search marketing firm Wordstream.
AdWords Ad Serving System Revamped
A big revamp recently of Google’s core AdWords ad serving system, called Enhanced Campaigns, was supposed to help remedy that situation. But its full impact clearly has not yet hit. The change, which officially kicks in July 22 but is already underway at most of Google’s millions of advertisers, is intended to spur more mobile ads and thus more competition in Google’s auction-based ad system, ultimately raising ad prices.
Jared Belsky, executive vice president at digital ad agency 360i, said in an interview that he expects that to happen, but it will take some time for advertisers to tweak their campaigns in the new system. He says about inevitably raising prices.
“There will be more demand for mobile ads.”
Indeed, Adobe’s advertising business recently reported that it was seeing higher Google ad prices as a result, though Google itself poured cold water on the report.
The overriding question is when that trend will kick in broadly, and by how much mobile ad prices will rise. “We see a more challenging growth outlook,” Scott Kessler, equity analyst with S&P Capital IQ, said in an interview.
Hightlights Of The Q2 2013 Earnings Call Report
A few other details from the quarterly report:
- Paid clicks rose 23% from a year ago, and 4% from the first quarter.
- Non-ad revenues such as Google Apps contracts with businesses, schools, and governments, as well as app sales, shot up 138%, to comprise 8% of Google’s revenues.
- Revenue growth would have been 22% if not for foreign currency rate changes.
- Google expects to continue to make “significant capital expenditures.”
- Headcount totaled 44,777 people–40,178 at Google and 4,599 at Motorola. That’s down from 53,891 in March, when there were 38,739 at Google and 5,170 at Motorola.
You can listen to a pre-recorded audio of the earnings conference call webcast by clicking the link to Google’s YouTube investor relations site. For more detail, take a gander at the earnings slides.
Google CEO Larry Page Talks Up Mobile, Android and Chrome and Adwards Enhanced Campaigns
In a statement, Google CEO Larry Page preferred, as he has for a long time, to cast the mobile issue as a future opportunity more than a current problem.
“Google had a great quarter with over $14 billion in revenue – up 19% year-on-year, The shift from one screen to multiple screens and mobility creates tremendous opportunity for Google. With more devices, more information, and more activity online than ever, the potential to improve people’s lives even more is immense.”
Page said Google had a “great” quarter, surely a bit of hyperbole given the disappointing numbers and the investor reaction. He immediately talked about the huge shift to mobile devices that he referenced in his statement.
First, he talked about platforms–Android and Chrome.
- 900 million+ Android devices have been activated worldwide.
- 1.5 million Android devices actived each day.
- 15 billion+ apps have been downloaded from the Play Store.
- Chrome, just four years old, has 750 million users worldwide.
Page then turned to apps–a revamped Maps user interface and navigation feature, for instance. Same with Google+, a complete redesign to use the entire screen, which looks the same on all screens and platforms. He also touts the video chat service Hangouts. Knowledge Graph, a catalog of info, keeps growing too. Google Now, the next-gen search service, also launched on Apple’s iOS.
OK, what about that Moto X? “I’m really excited” about what Motorola will launch, he says without mentioning the name of the soon-to-launch signature smartphone.
Then Page went on to the visionary stuff, such as Project Loon to provide global WiFi via balloons.
With that short, mostly news-free intro, he turned the call over the Chief Financial Officer Patrick Pichette to go over the numbers. You’ve already seen those, so I’ll spare you a rerun. Pichette did say that revenues would have been up 22% if not for currency fluctuations.
Chief Business Officer Nikesh Arora says business was especially strong in automotive and in Brazil, to name two divergent sectors. The U.K. was weak, though.
One thing he focuses on is the opportunity to work with brands to advertise more online, the explicit message being: You can do better by shifting TV ad dollars over to online.
He also says the non-ad business is growing rapidly, though he emphasizes the number of devices and apps more than the revenues, which are still fairly insignificant compared with the core business.
The enterprise business, that is sales to businesses of Google Apps software and services, also is growing quickly, he says.
Now on the main event, the Q&A portion:
Q: How is the transition to Enhanced Campaigns going–is ROI going up for customers? And are you providing conversion (sales) tracking across devices?
Arora: Six million campaigns have had to be migrated to the new system, he says. The ROI should continue to improve, he adds.
Q: Are there other hardware categories beyond smartphones and tablets that Google could do?
Page: We’ve been an early innovator in smartphones. Certainly over the long term, we’re going to have new kinds of devices. We’re obviously excited about Google Glass and interacting with new types of hardware. (No news on a smart watch, though, let alone a brain implant.)
Q: More color on expenses given the rise from Q1?
Pichette: Our expenses in Q2 were completely in line with expectations. Sometimes they come in a bit over and sometimes a bit under. That’s the issue between Q1 and Q2.
Q: Is mobile the main factor in ad price declines?
Pichette: It’s just one of the factors. It’s always just to look at CPCs (cost per click, or prices) or just at paid clicks. They can go all over quarter to quarter.
Q: How have hiring opportunities changed in the past year or two?
Page: I don’t think we’ve seen a significant change in hiring in the short term. Retention for the company has been great. We’re able to hire some of the best people in the world. It’s pretty stable.
Q: Why isn’t the R&D budget higher if there are so many opportunities?
Page: It’s our job to figure out how to invest more. It’s pretty easy to come up with ideas. It’s pretty hard to make them real for millions of people. I wish we could just snap our fingers and accomplish this. It’s hard work to scale and that’s what we do.
Q: What specific financial metrics do you use to evaluate Google Fiber as a business?
Pichette: We already had profitability as one of the key criteria for this business. There’s no real rocket science in the finances of it. It’s the technological infrastructure to make it 100 times faster.
Q: Why the networks revenue growth decline to 7% growth this quarter vs. 12% in Q1?
Pichette talks about DLA policies, an acronym whose meaning escapes me for the moment. Update: Actually, I think he was talking about Product Listing Ads.
Q: What gets mobile ad conversion up in the next few quarters?
Arora: We have to understand the cross-device behavior and conversion better. We need to understand the context of the user a lot better.
Q: What’s the timeline for Gmail app updates and impact on this as marketing distribution channel?
Page says he actually doesn’t know the details of the rollout. But Google is trying to improve the commercial offers in email, and trying to make sure people don’t feel spammed.
Q: Update on automated cars and commercialization?
Page: It’s really early on. No real updates, especially on commercialization.
Q: Data centers and other infrastructure is lumpy, you said, but is amortization part of what’s causing the rise in operating expenses?
Pichette: We don’t give the details. But data centers have a long lifetime, but the computers themselves have a much shorter lifetime. But nothing unexpected.
Q: How do you ensure that people at Google keep small entrepreneurial culture Google had in early days?
Page: I’m very excited to see things like Project Loon and automated cars. I want to make sure people at Google have permission to do these things. That’s the only way we end up with things like Android and Chrome. I look at it like a portfolio.
Q: We expected to see some impact of Enhanced Campaigns, like higher prices. Why didn’t that happen?
Page: We’re still in very, very early stages. Biggest change ever in AdWords. It’s been pretty smooth. We’re very pleased with how it’s going. (Which didn’t actually answer the question.)
Q: What’s the impact on network revenues growth of quality improvements?
Pichette: Updated from transcript: Basically it was indeed the quality improvements–cleaning up site, which are part of Google’s network of outside websites where it runs ads, that don’t add much valuable content besides the ads–that were responsible for the decline in growth from 12% in Q1 to 7% in Q2.
Q: Was there any impact from Enhanced Campaigns on paid clicks and CPC? If not, how long will it take? (Good for Goldman Sachs analyst Heather Bellini for repeating the unanswered question. It is clearly the main concern of analysts here, since Enhanced Campaigns was supposed to reverse the downward price trend.)
Arora: We’re still looking at the full impact. Longer-term, we should be able to provide simpler, better, faster ads. Over the long term, it should have a positive impact on conversions.
Q: How did foreign exchange affect ad prices?
Q: Gross profit has been trailing revenue growth for three quarters. What drove the step down in Q3 of last year?
Pichette: We care about both revenue growth and profitability. We really look at every incremental profit dollar rather than the percentage margins. We’ll have different margins in our core business, but they offer great, huge revenue pools in actual dollars. And there can be synergistic value between products. That’s the mindset that we apply. We remain focused on our core business. The core is the core is the core. (Pichette goes zen on us.)
Q: Product Listing Ads impact?
Pichette: People want an answer more than 10 blue links. We are signing up tens of thousands of merchants.
Q: Will users be able to purchase items without ever leaving the search results pages at some point? (Very interesting question, given the rising possibility that mobile apps from Amazon, Yelp, and many others could usurp traditional search.)
Page: We’re doing a trial in the Bay Area in same-day delivery. (He doesn’t answer the question, though.)
Q: What about Moto X? Will you be aggressively marketing it? How will you avoid impacting your Android partners?
Page: Nothing about what we’ve said has changed. They’re working hard on making great products. You’ll get to try it out pretty soon.
Q: Will the marketing investment be $500 million as reported?
Page: They’re operating Motorola independently. But I think too much has been made over these things. (Whatever that means.)
Q: How widely do you see Google expanding into subscription businesses–big in three to five years?
Page: I’m sure over time we’ll have products in those areas, but no specific plans to talk about.
Q: Motorola has lost a billion dollars in the last three quarters, so what’s the ultimate aim for Motorola to c0ntribute to Google’s profit base or even spread Google’s services?
Pichette: We divested the home (settop) business for a lot of cash. It’s now lean and mean under Dennis (Woodside, the Google exec now running Motorola).
And that’s a wrap.
Google’s shares are now down a little over 4%, indicating a slight lessening of investor concern. Still, so much for those $1,000 price targets.
COMMENTARY: Google's disappointing mobile revenue numbers clearly demonstrates the challenges digital advertising platforms face in monetizing mobile. Facebook is facing the same challenge when it comes to mobile advertising. Investors wait for Facebook's earnings conference call later today at 5:00 p.m. EST.
The "Mobile Lifestyle," a term coined by the late Steve Jobs of Apple, has driven more users to use mobile devices like smartphones and tablets to access the Net, read their email, view video and digital images, and log into their favorite social networks, The rapid movement to mobile devies is not going to change in the foreseeable future. What will probably change is the number of smartphones and tablets as adoption becomes saturated.
The biggest challenges for digital media platforms like Google, and Facebook for that matter, will be to find new ways to motivate users to use their mobile devices longer and designing compelling ads that are effective in reaching consumers while overcoming the limitations and disadvantages of the smaller display real estate on mobile devices.
Earlier this year, Facebook launched Facebook Home a mobile app that locked up a smartphone users startup display to show their Facebook newsfeed and what their friends were doing online. This experiment failed miserably because it was too intrusive and ruined the users overall mobile phone experience. Google has to be careful that they don't repeat that mistake.
So far I like what Google management said about Enhanced Campaigns during their Q2 2013 earnings conference call, and I tend to agree that it will take a bit while longer to see the benefits of the new AdWords enhancements to multiple platforms.
The new Enhanced Campaigns, which change how ads are run on desktop and mobile devices, have come to 75% of advertisers, a week before it becomes mandatory.
What are Enhanced Campaigns?
What Google says:
According to the official Google adWords Blog Enhanced Campaigns will give marketers the ability to bid on multiple devices more easily by allowing for segmented bidding from within a single campaign. According to the Goog, users are utilizing multiple touch points when making purchasing decisions and are moving seamlessly between devices. They even offered a snazzy slideshow and infographic to show how this is happening:
Here’s an overview of some key features.
- Powerful marketing tools for the multi-device world - People want search results that are relevant for the context they are in — their device, location and the time of day. Enhanced campaigns help you better manage your campaigns and budgets for this multi-device world. With bid adjustments, you can manage bids for your ads across devices, locations, time of day and more — all from a single campaign. Example: A breakfast cafe wants to reach people nearby searching for "coffee" or "breakfast" on a smartphone. Using bid adjustments, with three simple entries, they can bid 25% higher for people searching a half-mile away, 20% lower for searches after 11am, and 50% higher for searches on smartphones. These bid adjustments can apply to all ads and all keywords in one single campaign.
- Smarter ads optimized for varying user contexts - People on the go or near your store may be looking for different things than someone sitting at their desk. With enhanced campaigns, you’ll show ads across devices with the right ad text, sitelink, app or extension, without having to edit each campaign for every possible combination of devices, location and time of day. Example: A national retailer with both physical locations and a website can show ads with click-to-call and location extensions for people searching on their smartphones, while showing an ad for their e-commerce website to people searching on a PC — all within a single campaign.
- Advanced reports to measure new conversion types - Technology is enabling people to take action on your ads in new ways. Potential customers may see your ad and download your app, or they may call you. It’s been hard for marketers to easily measure and compare these interactions. To help you measure the full value of your campaigns, enhanced campaigns enables you to easily count calls and app downloads as conversions in your AdWords reports. Example: You can count phone calls of 60 seconds or longer that result from a click-to-call ad as a conversion in your AdWords reports, and compare them to other conversions like leads, sales and downloads.
Upgrading to enhanced campaigns
Enhanced campaigns will roll out to advertisers as an option over the next few weeks, and we plan to upgrade all campaigns in mid-2013.
Enhanced campaigns are designed to help you succeed in a multi-screen world, but we know that transitioning may involve some initial changes. Here are some resources to help you:
Courtesy of an article dated July 18, 2013 appearing in Forbes and an article dated February 7, 2013 appearing in Zen Search Marketing and an article dated February 6, 2013 appearing Google Inside AdWords