Google's Quarterly Earnings Report and the SEM Industry

 

The sky isn’t falling, regardless of what Wall Street seems to think of Google’s latest earnings and revenue. On Tuesday, Google reported its Q4 2005 earnings, and anyone other than Wall Street would have interpreted the news as rosy.

Clearly, Wall Street has estimated much higher revenue and earnings than Google delivered, sending Google’s shares below 400 (as I write). The question is whether Wall Street’s irrational expectations and exuberance for Google, and the resulting dramatic change in Google’s stock price and company valuation, will have any effect on the SEM (define) industry.

Google reported revenue of $1.9 billion for Q4 2005, an 86 percent increase over Q4 2004 ($1.0 billion). This is also a 22 percent increase over Q3 2005 revenue ($1.6 billion).

An 86 percent increase in same-quarter revenue over the previous year apparently is considered bad news for Google. Nearly any other large company would kill for that kind of revenue growth. Most Madison Avenue agencies would also kill for revenue growth numbers like Google’s.

Yahoo reported Q4 2005 revenue and earnings in January, as well. Analysts and stockholders were similarly disappointed, driving share price and company market capitalization down from peak levels. Google’s and Yahoo’s disappointments are quite different, however. Yahoo executives are generally more proactive in managing the street’s expectations by making sure the expected revenue and earnings aren’t too out of line with reported revenue and earnings.

Google, on the other hand, does things its own way. That’s hardly surprising. Google executives don’t release much information between quarterly reports, which isn’t likely to change. On Tuesday’s earnings call, Google CEO Eric Schmidt said, “I’d like to remind everybody that our policy is to not to give any forward guidance, and we are going to continue that policy for the indefinite future.” Part of the reason Google can afford to be a bit more cavalier is its two-tiered stock plan, which gives it more independence from outside investor influence.

Search marketers are wondering how these earnings announcements will affect their industry as a whole. I don’t see either of these revenue and earnings disappointments spelling doom and gloom. Google’s and Yahoo’s stock prices aren’t synonymous with the health of the SEM business. In fact, some of the outcome of these earnings disappointments may be positive, if you consider the following:

• Search engine executive management can focus more on product development. Marketers will spend more as the ability to target and control traffic improves.
• Investors and venture capitalists will realize search, like any other business, can’t grow at a rocket’s pace forever. Unrealistic investor expectations aren’t positive for an industry. All of us in the industry know search will continue robust growth; even Google’s and Yahoo’s numbers indicate it.
• Employees will choose to be involved in this industry not because it offers the promise of easy riches, but because it’s one of the most fascinating, challenging, and rewarding industries one could choose. (OK, I’m biased.)
• The mainstream and business press might stop fixating on stock prices and Google’s and Yahoo’s valuations, and instead report on how important it is for businesses to understand where search fits into a marketing plan.
• Startup search engines looking to unseat Google, Yahoo, and MSN must demonstrate real value to the investment community before receiving checks in excess of $10 million. This will also be true of SEM and technology companies. At investor conferences recently, there was an unsettling tone of irrational exuberance among some investors, many of whom don’t even understand how Google and Yahoo earn their money by providing value to the advertising and marketing community.

Though I enjoy speaking with analysts at investment banks, hedge funds, venture capital firms, and private equity funds — all of whom want to understand the SEM landscape better — it’s much more fun working with my team on major marketers’ campaigns to break through the prior performance records in PPC (define) search. There’s a reward in that, which can’t be equaled by watching or participating in the rollercoaster stock markets.

To succeed as an industry, we must continue to deliver value to advertisers. Agencies and search engine staff must work together to figure out how best to apply technology, strategy, and innovation to take marketers to a new level of understanding and performance. We’ve done a great job thus far. Though the rocket may not be as fast as Wall Street wants it to be, we’re still in for a wild ride over the next few years as the industry continues to evolve.

Meet Kevin at Search Engine Strategies in New York City, February 27-March 2.

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