Google set to report amid troubling data
Web search giant faces questions of a slowdown in ad clicks
By John Letzing, MarketWatch
Last update: 11:46 a.m. EDT April 17, 2008
SAN FRANCISCO (MarketWatch) -- As Google Inc. prepares to report its first quarterly results of the new year on Thursday afternoon, the Web search giant faces key questions about the health of its core advertising business.
Google (GOOG: 452.41, -2.62, -0.6%) will report first-quarter results after the closing bell Thursday. Wall Street is expecting revenue to grow by 42% for the period, with a strong corresponding rise in earnings. But the numbers may also help investors understand whether recent reports of a slowdown in Web users clicking on ads have cut into the bottom line.
Analysts on average expect Google to post earnings of $4.55 a share on net sales of $3.6 billion for the period ended in March, according to FactSet Research. That compares with earnings of $3.68 a share in the same period a year earlier, when net sales were $2.53 billion. The company doesn't provide its own financial forecasts.
Overall sentiment remains positive on the company. Recent data from comScore Inc. have shown Google enjoying a growing share of the Internet search market. At the same time, however, the company may be suffering from a slowdown in paid clicks, which refer to the number of times Web users click on an ad-supported link -- a main driver of revenue for the company.
Google shares have fallen more than 30% since the beginning of the year. The stock closed Wednesday with a slight gain at $455.03 and was down about 1.5% midway through Thursday's session.
ComScore data showed Google's U.S. search market share rising to 59.8% in March, while that of rival Yahoo Inc. (YHOO: 28.09, -0.22, -0.8%) slipped to 21.3% and that of Microsoft Corp. (MSFT: 29.25, +0.30, +1.0%) fell to 9.4%.
Other recent comScore data showed Google had paid-click growth of only 2.7% in March, a marked slowdown compared to previous periods.
In addition, the March paid-click data followed reports for January and February that also showed weak growth, ranging from flat to 3%. Google had seen 25% paid-click growth as recently as the fourth quarter of last year.
Now, the pressing question for analysts and investors is: Has Google been able to offset its drop in clicks by garnering a larger amount of revenue from the clicks that it's managed to elicit?
Analysts have speculated that the cause of paid-click slowdown may be a worsening economy, which has deterred Web users from doing things like seeking out nonessential purchases online.
That would seem to complicate Google's own explanation for the paid-click slowdown, which is that much of it is due to quality initiatives. Those initiatives include reducing accidental clicks and the sale of keywords less likely to lead users where they want to go online.
Wall Street analysts have had mixed reactions to Google's paid-click data.
Collins Stewart analyst Sandeep Aggarwal wrote in a note to clients Tuesday that, thanks to the paid-click slowdown, "Google remains exposed to a 'miss' March quarter." Aggarwal wrote that "economic headwinds will continue to impact discretionary search ad spending in the near future."
Aggarwal has a hold rating on Google stock and a $535 price target on its shares.
Thomas Weisel analyst Christa Quarles wrote in a note to clients Wednesday that all of the recent negative news about Google's paid-click growth could actually work in its favor, because it's well-positioned for future growth both in the U.S. and in international markets like India and Russia.
With "investor confidence on the rocks, and Google's two biggest competitors Yahoo and Microsoft engaged in a nasty proxy fight, we continue to believe there is a great opportunity in [Google] shares," Quarles wrote.
Quarles has an overweight rating on Google shares and a $745 price target.
John Letzing is a MarketWatch reporter based in San Francisco. -----------
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