Many investors are breathing a sigh of relief after Google announced earnings on Thursday beating the consensus street estimates. In recent months, investors have become understandably concerned that the decline in U.S. consumers’ spending could translate into a cutback in online advertising, an industry many thought would be immune from an economic downturn. And with the dearth of public information available on Google’s key revenue drivers, the market turned much of its attention to Comscore’s paid click report to help understand what might be going on with one of the key determinants of Google’s revenue.
Comscore reported that Google’s U.S. paid clicks in Q1 were up 2% vs. year ago, and down 9% vs. Q4 ’07. During the earnings call, Google noted a 20% increase in aggregate paid clicks vs. year ago and a 4% sequential gain.
Why the discrepancy, you may ask?
As is always the case, we need an apples-to-apple comparison. Comscore’s paid click report refers to domestic paid search clicks only, while Google’s “aggregate paid clicks” refers to global search and also includes affiliate site ads (i.e. AdSense). Two fundamental components of Google’s reported number – international clicks and AdSense clicks – are not currently included in the Comscore report.
Google reported Q1 ‘08 revenue growth of 7% vs. Q4 ’07, with international revenue up approximately 14% and domestic growth (excluding the DoubleClick acquisition) essentially flat. If we take Google’s overall revenue growth of 7% and their reported 4% increase in aggregate paid clicks, we can estimate that the average cost-per-click (CPC) increase during the quarter was approximately 3%.
Now, if domestic paid click revenue was flat while CPC was up 3%, we can conclude that aggregate domestic paid clicks declined about 3% during the quarter. This brings us a lot closer to our estimated 9% decline in paid clicks. The remaining delta can likely be partially explained by strong revenue growth from Google’s YouTube and the Adsense network. In fact, Comscore’s U.S. Video Metrix numbers show YouTube is up ~20% vs. Q4 in terms of video views.
Comscore has always cautioned that there are multiple factors that needed to be considered when projecting Google’s earnings this quarter. In a February blog post on the subject, Comscore CEO Dr. Magid Abraham and SVP James Lamberti concluded “There is no obvious reason why the economy would negatively impact" Google’s paid clicks, based on our analysis of the paid click activity at other search engines.
Moreover, when asked by the Wall Street Journal’s Kevin Delaney on Wednesday – one day before Google reported -- what our paid click data might indicate for Google, Dr. Abraham said he believed that Comscore’s paid click data were consistent with 5-10% revenue growth. In retrospect, the prediction proved to be quite accurate.
In summary, a closer analysis of the Google results confirms that: 1) U.S. paid clicks have indeed softened, 2) that the softening is not due to the economy, and 3) Google’s overall revenue performance was driven by strong international growth and CPC increases. Comscore has been consistent in its assessment that U.S. paid clicks alone would not tell the full story without considering CPC increases, that macroeconomic factors did not appear to be weighing on Google, and that Google might well have solid revenue growth in Q1.