Google's paid click growth rates: Reasons for the decline; Earnings on deck

Google's first quarter results on Thursday will be closely watched for the impact of the search giant's anemic paid click growth rates, but Merrill Lynch analyst Justin Post already has a few explanations.In a research note, Post outlined the takeaways from five search engine marketers, who tried to explain why Google's paid click growth rates stunk in the first quarter.

Google's first quarter results on Thursday will be closely watched for the impact of the search giant's anemic paid click growth rates, but Merrill Lynch analyst Justin Post already has a few explanations.

In a research note, Post outlined the takeaways from five search engine marketers, who tried to explain why Google's paid click growth rates stunk in the first quarter. The key reasons from Post's note:

SEMs said that they saw many click arbitrageurs (advertisers who are able to buy cheap terms for lower CPCs and resell those clicks on their own sites) were minimized by Google in the quarter, likely due to tweaks to the importance of the landing page input to Google's Quality Score algorithm. By minimizing these arbitrageurs, Google may reduce total coverage/clicks, but can raise revenue per click because arbitrageurs were usually paying a fraction of average CPCs. If Google can add one $0.60 click as a replacement for four $0.20 clicks, the impact is much less than implied by click data.

And.

Google has been strategically reducing the amount of searches that return paid ads (coverage) over the past 18 months, and in 1Q it fell to 46% from 52% in 4Q. By improving their algorithms, Google improves the user experience versus competitors, while also improving advertiser ROI which will then flow back as higher bid prices. According to our SEM contacts, ROIs did rise in 1Q and as they rose, advertisers increased their bids to increase volume, particularly less well-branded advertisers.

And.

One SEM felt that Universal Search, including relevant image and video results in search results, was drawing users' eyeballs away from ads.

Bottom line: Post accepts those reasons and notes that the paid click flap is overblown. He expects Google to top Wall Street estimates. For the first quarter, Google is expected to report first quarter earnings of $4.52 a share on revenue of $3.6 billion.

Other key items to watch when Google reports:

  • Management credibility: On Google's fourth quarter conference call, CEO Eric Schmidt and the gang said the company saw no impact from the economy. Later in the quarter, management disputed the paid click data that had folks spooked. Oppenheimer analyst Jason Helfstein says that if the quarter disappoints, Google management may have some credibility issues. "To the extent this quarter disappoints, or the company's tone changes, we see less investor support," he said.
  • DoubleClick's profit margins: Analysts haven't been accounting for DoubleClick's profit margins, which could bring down Google's. What's unclear is whether there will be any lasting impact.
  • Can international revenue save Google's quarter? Google has a sizeable international business and it's likely to get a currency bump. Has international growth slowed at all?
  • Macroeconomic conditions: What is Google seeing in the domestic economy and how is consumer behavior changing?