Google gets defensive over cost-per-click declines
Google (GOOGL) executives must be pretty tired of hearing analysts and reporters fret over the search giant's mobile advertising strategy.
For a total change of pace on Thursday, they actually shed some light on the dynamics underlying the company's advertising business at a level of detail usually kept secret.
For quarter after quarter, the amount of money Google reports receiving for each click on one of its ads, so-called cost-per-click, has been falling. In the first quarter, cost-per-click, or CPC dropped 7% overall, including a 13% decline on Google-owned websites. The overall CPC had declined 3% the prior quarter, and as much as 11% in one quarter since the beginning of 2013. Google's revenue has continued to grow only because the number of clicks has grown fast enough to outpace the decline in dollars brought in per click.
Outsiders have thought the continuing declines were due to the massive shift toward mobile phones. After all, ads on mobile websites bring in much smaller dollars than similar ads on desktop PC web sites. And while Google has a commanding share of the search advertising market on desktop computers, its share of mobile ad revenue is thought to be lower.
But Google CFO Patrick Pichette, in his final quarterly conference call with analysts before retiring, rejected that theory -- and offered some evidence.
"So many commentators are incorrectly assuming that the growth trends in our sites, clicks and CPCs are primarily due to difficulties monetizing search on mobile," he told the analysts. "That's in fact not the case."
According to Pichette, the cost-per-click is actually rising at Google overall even as users do more searching on mobile phones. The overlooked variable is the rapid growth of advertising on YouTube, especially in less developed countries where ad rates are much lower. That is causing the number of clicks on ads to grow much more rapidly but the price per click to drop more rapidly.
One billion viewers
Later on the call, Omid Kordestani, Google's chief business officer, revealed that one-third of all people on the Internet watch hundreds of millions of hours on YouTube every day and that the video service has over 1 billion monthly active users. The number of advertisers on YouTube grew 45% last year, he said. And all of the 100 largest advertising brands had run "TrueView" ads, a product that only charges the advertiser when a viewer watches at least 30 seconds or to the end of a video ad.
The revelations got the attention of the analysts, who peppered Pichette and Kordestani with further questions, hoping for further insights on the subject from the notoriously tight-lipped executive team. Google has even battled the Securities and Exchange Commission to avoid revealing any more details about underlying trends in its ad business. Unfortunately for the analysts, after Pichette's small bit of detail, there wasn't much more for the rest of the hour-long call.
There were no questions about the company's topline results. Google reported revenue of $17.3 billion, up 12%, and revenue after subtracting the costs of acquiring web traffic of $13.9 billion, just below the average analyst estimate of $14.05 billion. Pichette said the revenue would have been almost $800million higher if not for the strength of the U.S. dollar. Adjusted earnings per share of $6.57 also just missed Wall Street's $6.61 average forecast, according to FactSet.
Analysts wanted more details about the costs per click trends.
Carlos Kirjner of Bernstein Research asked for more detail about the pace of improvement of monetizing ads on mobile web sites. He got only platitudes. "We are actually very excited about mobile improvement," Kordestani replied.
Mark Mahaney of RBC admitted that he and most others had thought the issue was "driven mostly by mobile." He asked for a multi-year deep dive. "I'm just saying what we've seen in this quarter," Pichette answered, declining to dig into history.
When another analyst asked Pichette to compare the current situation to a year earlier, it was a repeat from the CFO. "What I wanted to do today was clarify the issue between YouTube and our dot-com properties rather than to go into all the details," he said.
YouTube profits
Toward the end of the call, Pichette also defended YouTube's business results with regard to stories that have reported the huge video site isn't making any profits.
"If you just want to make YouTube profitable tomorrow, that's very easy," he said. Instead, Google is pursuing a strategy much like other, smaller fast-growing Internet companies by reinvesting all profits back into to the business to fuel further growth.
Pichette announced his coming retirement last month in a moving letter posted on the Google Plus social network. As he approached his 25th wedding anniversary with his wife, Tamar, Pichette said he realized it was time to step down.
"I could not find a good argument to tell Tamar we should wait any longer for us to grab our backpacks and hit the road - celebrate our last 25 years together by turning the page and enjoy a perfectly fine mid life crisis full of bliss and beauty," Pichette wrote.
Ruth Porat, former CFO of Morgan Stanley (MS), will take over the job and represent Google on next quarter's conference call.
