What Google's Earnings Jump And CPC Sequential Revenue Slide Tell Advertising Industry

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Google reported Thursday that revenue rose 23% to $6.77 billion for the quarter ended March 31, 2010, compared to the first quarter of 2009. And while earnings continue to improve, profits fell short of analysts' expectations, and sequential cost per clicks had a rocky ride.

Net income rose 37% to $1.96 billion -- or $6.06 a share -- from $1.42 billion, or $4.49 a share, in the year-ago quarter. JP Morgan Analyst Imran Khan had estimated net revenue growth of 2.4% versus Google's 2.2% sequentially.

Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of AdSense partners, rose 15% in the first quarter of 2010 compared with the year-ago quarter, and 5%, sequentially.

For the most part, advertising held strong, but revenue generated from cost per clicks took a bit of a roller coaster ride sequentially. Average CPC -- which includes clicks related to ads served on Google sites and the sites of AdSense partners -- increased approximately 7% in the first quarter, compared with the year-ago quarter, but declined 4% sequentially.

Google reminded those on a conference call with investors that the company has been releasing tools that help advertisers find long-tail keywords, which might make CPCs vary. In time the tech tools should drive higher revenue from CPCs.

Traffic acquisition costs -- the portion of revenue shared with Google's partners -- rose to $1.71 billion in the first quarter of 2010, compared with $1.44 billion in the year-ago quarter. TAC as a percentage of advertising revenue came in at 26% in the first quarter of 2010, compared with 27% in the first quarter of 2009. TAC relates to amounts ultimately paid to Google's AdSense partners, which totaled $1.45 billion in the first quarter of 2010.

Patrick Pichette, senior vice president and chief financial officer at Google, attributed any declined to seasonal swings, and the company plans to move forward with hiring new people, as well as making investments in search, display and mobile.

Large advertisers have come back in force, Pichette says, which might explain some findings from the Interactive Advertising Bureau (IAB) for 2009, as the industry moved into 2010.

Gian Fulgoni, comScore chairman and co-founder, points to the recent 2009 data from the IAB to provide perspective on industry trends that began to emerge in the first quarter of 2010. "In the fourth quarter search only grew 4% from a year ago, while display grew 15%," he says. "Spending on display ads, for some reason, grew four times faster than search, which raises interesting questions on the types of advertisers that are spending money."

Search revenue rose 4% to $2.9 billion in the fourth quarter of 2009, according to IAB. The industry group reported that display-related advertising -- banner, rich media, video and sponsorship -- accounted for $2.3 billion or 37% of total revenue during the quarter of 2009, up nearly 15% from the $2 billion -- or 33% -- reported in the year-ago quarter.

The advertising industry went through the recession toward the end of 2008 and through 2009. Ad spending slowed. During this time display and search ads were basically flat, Fulgoni says. "Then companies started spending more on advertising as the economy began to improve, but we came out on the other side of the downturn to see display outsell search," he says. "It struck me as odd because search had been growing faster."

Fulgoni says that perhaps the search industry has begun to reach maturity, pricing has become an issue for advertisers, or they realize clicks on ads don't produce relevant metric, so more advertisers have begun to sink money into display.

Another hypothesis points to the fact that smaller companies typically rely on search marketing. But if small companies are not doing well financially, they're likely not buying ads.

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