Google's Upward March Continues -- but for How Long?

Search Giant Reports 26% Increase in Quarterly Income, but Is Vague About Category's Strength Going Forward

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NEW YORK ( -- The good news: Search is still a bright spot. The not-so-good news: There's no clarity going forward.

Wall Street seemed pleased with Google's earnings report today -- and lord knows it could use some positive news. The search giant indicated growth still exists in the online ad space during a tough economy, notching a healthy third-quarter net income of $1.35 billion, up 26% from $1.07 billion during the year-ago period; third-quarter earnings per share were $4.24, up from $3.38 for the year-ago period.

Searching for specifics
But the company begged off any questions about what the outlook for search advertising could be. That isn't terribly surprising, as Google is never big on sharing its business outlook, but in this case the company's stance seemed unusually vague, whereas in the past it may have mentioned categories of strength or weakness.

Aggregate paid clicks -- a metric that includes clicks on paid search ads and the contextual ads displayed on sites that use Google's AdSense -- grew 18% over the third quarter of 2007, and CEO Eric Schmidt said search queries grew year-over-year in every vertical category.

"As consumer budgets are squeezed, people use the web to hunt for bargains online and in stores," Mr. Schmidt said. In addition to benefiting from increased web searches, he said, Google has opportunities to grow in a recession by offering Google Apps to companies looking to cut IT costs, and he also believes improved display-ad targeting will lure more advertisers to use Google.

Recently, Google launched a build-your-own-display-ad tool to encourage more advertisers to use its display network.

Time to focus
But Mr. Schmidt was quick to explain that Google was still trying to keep costs down. "It makes sense given everything we read in the papers," he said. He didn't specifically address whether Google would scale back some of the non-core investments and experiments it has made over the past several years but seemed to imply that was the case. He called the economic slowdown "a great focusing opportunity" for Google and said that search -- Google's core business -- is where much of the investment is going.

A specific question on the retail vertical was left largely unanswered. "There's so much uncertainty now in the financial markets, the press and potential government action, that it's very, very hard for us to give you a sense of what's going to happen in retail or any other category between now and the holiday season," Mr. Schmidt said.

Google's chief economist, Hal Varian, repeated the theory that a recessionary environment has an upside for Google because "as people shop more carefully, they're going to be researching the things they buy" -- via Google, presumably.

Yet other reports indicate weakness in retail and e-commerce. A study from search-technology provider SearchIgnite found that while overall year-over-year third-quarter spend was up almost 27%, retail spending on search advertising was up just 1.5% and actually declined as the quarter wore on.

Conversion rates ambiguous
While conversion rates -- the rate at which a consumer who clicks on a paid search ad actually goes on to buy a product -- were up, the margins on those conversions were going down, something SearchIgnite notes could be caused by retailers' aggressive discounts and promotions.

EBay, one of Google's largest advertisers, announced yesterday it would slash its third-quarter forecast as its quarter got weaker from mid-August on, particularly in retail and autos. It said that overall downward e-commerce trends were hurting PayPal growth rates.
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