Google Saw Display Ad Progress in Q2

Investors punished Google’s stock last night after it reported lower than expected Q2 net income. But CEO Eric Schmidt and his cohorts shrugged off their concerns, focusing comments instead on upbeat developments in the company’s search and display ad businesses.

They pointed to Google’s landmark advertising deal with Yahoo, the integration of DoubleClick, and blue chip advertisers’ positive response to its recent acceptance of third-party ad servers.

They said Lenovo, Foot Locker, Kraft foods, and Lipton were among the consumer brands to embrace Google’s content network in the wake of its acceptance of third-party ad tags such as those served by Atlas, ValueClick’s Mediaplex platform, and its own DoubleClick unit. Many of those advertisers had previously restricted their spending with Google to search advertising, or placed display ads in only a limited way.

“This is important to many advertisers,” said Schmidt.

Meanwhile, Google rival Microsoft reported its own earnings for the three-month period ended June 30, and also highlighted higher rates of advertiser adoption. In addition to increasing the number of advertisers using its marketing services platform by 28 percent, it said it signed up 680 merchants and 200,000 users to take part in its new Live Search Cashback program. That program offers searchers rebates on the purchase of products discovered through its search interface.

However Microsoft said yesterday it has seen a direct impact on display ad revenues as a result of tightening ad budgets.

“We are not immune to that in the online space and we’ll probably see that continuing certainly for the next quarter,” said Microsoft Chief Financial Officer Chris Liddell.

Google’s ad click volume, a persistent area of concern for stockholders, grew 19 percent year over year but declined 1 percent sequentially. Co-founder Sergey Brin told investors Google routinely slashes the number of ads it serves in the interest of improving the user experience, and he said those reductions generally correspond to in-house improvements in monetization. But Brin also admitted that in the quarter just ended, Google may have gone too far in cutting the number of ads it’s serving per query.

“There is some evidence that we’ve been a little more aggressive in reducing coverage than we ought to have been,” he said.

Continually reducing the number of ads served per query is “not going to work indefinitely,” he said, adding, “I don’t know that we’ve decreased them past the optimal point, but I do know that we will do that in the near future if we keep the current system in place.”

Google reported net income of $1.25 billion on revenues of $5.37 billion in the second quarter, growing slower than the year-ago period and dropping sequentially from Q1’s $1.31 billion in net profits.

Chief Financial Officer George Reyes said the sequential earnings decline reflected “a continued focus on delivering high quality traffic to our advertisers and typical Q2 seasonality.”