Google Must Look At Verticalization

It looks as though the recession has finally caught up with Google. Yesterday the search giant announced Q1 results which reflected the troubled economy and more particularly the decline in clients’ advertising budgets. This post discusses Google’s missed opportunity in verticalization.

Revenues of $5.51 billion grew 6% over the year and were in line with the market’s expectations. Revenues, however, did decline 3% sequentially; this was the first qoq decline since the company’s 2004 IPO. EPS of $5.16 grew 7% over the year and exceeded the market’s expectations of $4.93.

Here is a quick look at the company’s revenue breakdown. Google Sites Revenues generated $3.70 billion and contributed 67% of total revenues in the quarter growing by 9% over the previous year and reducing by 3% over the previous quarter. Google’s partner sites, also known as Network Revenues, generated $1.64 billion revenues through AdSense programs and contributed 30% of the quarter’s revenues. AdSense revenues fell 3% over the year and over the quarter.

International revenues of $2.88 billion represented 52% of total revenues, compared to 51% in the previous year and 50% in the previous quarter. Revenues from the United Kingdom of $733 million represented 13% of revenue in the quarter, compared to 15% in the previous year and 12% in the previous quarter.

In the quarter Google recognized a benefit of $154 million to revenue through its foreign exchange risk management program.

Google continued to innovate to improve search monetization by focusing on overhauling advertising tools for AdWords to improve the experience for advertisers and improving click rates through the introduction of Automatic keyword spellcheckers. During the quarter, their Paid Clicks (PPC), which includes clicks related to ads served on Google sites and the sites of its AdSense partners, increased approximately 17% over the previous year and approximately 3% over the previous quarter.

The YouTube monetization strategy seemed to be on track as the video site made good progress on deals with large studios. Google tied up with Sony Corp to add the latter’s films and TV shows to YouTube. Yesterday, it also announced plans to offer free TV shows and full-length movies from Sony Pictures, CBS, MGM, Lions Gate Entertainment and Liberty Media’s Star.

Google’s management said that they will increase their focus on reducing costs. They have reason to do so: growth in the quarter was the weakest in its history since Google went public. As mentioned above, this quarter was also the first ever reflecting sequential revenue decline. Google is blaming its performance on the market conditions, wherein users are searching, but not buying.

But, I feel the blame lies with Google as well. The company spends big money to hire the best engineers. In a season when most companies have downsized, Google has reduced their headcount by a mere 58 people – not even a 1% reduction. What is really sad is that significant revenue growth does not emerge from any internal developments by their employees. Even though further job cuts are expected from the company and it announced nearly 200 job cuts to the sales and marketing team, Google does seem slow to react to the market’s challenges.

Google also shook up its sales team. Nikesh Arora, currently president of International Operations, is set to take over global sales from Omid Kordestani and will be responsible for revenue and customer operations while Kordestani will be a senior advisor to the Office of the CEO and Founders. Earlier this year, Tim Armstrong, head of the Americas operations, left Google to become CEO of Time Warner’s AOL unit. Sukhinder Singh Cassidy, who headed Latin America and Asia Pacific, also left.

Whatever growth Google has achieved has been through acquisitions. At current valuations, acquisitions might be the way to grow, but doesn’t Google need to shake itself up as well? Of late, there has been growing talk of the company using some of its $17.8 billion cash to acquire Twitter. However, CEO Eric Schmidt said that Google was looking at advertising partnerships with companies like Twitter, not acquisition. Google’s Vertical Search strategy still remains unaddressed, as does a compelling Web 3.0 endeavor. Acc. to the IAB’s 2008 report, newspapers still constitute $34.4 billion of the total advertising budget, with Internet advertising at $23.4 billion. The most likely budget shift in 2009 will be from Newspapers to Internet Search Marketing. Google is clearly well-positioned to benefit for this, but the movement would be much more rapid if Google were able to deliver on vertical search to contend against vertical classifieds, one of the mainstays of newspaper advertising.

In the after-hours session, the stock crossed the $400 mark before falling to $388.24 with a market capitalization of nearly $125 billion.