Digital Media

Google has withstood the current economic troubles better than other advertising-dependent companies, but on Thursday, investors will get to see how well the company's belt-tightening is offsetting the recession's deepening effects.

The search giant, which makes the vast majority of its revenue when people click on ads next to search results, reports first-quarter financial results Thursday after the market closes. So far, though, financial analysts are mixed on whether Google's glass is half full or half empty.

On average, analysts surveyed by Thomson Reuters expect revenue excluding commissions to increase 11 percent to $4.085 billion and earnings to increase 2 percent to $4.93 per share compared with a year ago. Because Google reported $4.22 billion in fourth-quarter revenue excluding commissions, this could be the first revenue drop from one quarter to the next.

Google's Mountain View, Calif., headquarters

(Credit: Stephen Shankland/CNET)

But analysts differ in their assessments.

Broadpoint AmTech analyst Rob Sanderson is on the half-empty side. He downgraded Google's stock from "buy" to "neutral," with this to say: "We believe consensus estimates are too high and need to come down for the first quarter and second quarter...We see the stock as more risky in the near-term and believe there may be a better entry point."

But Oppenheimer & Co.'s Jason Helfstein and Anil Gupta differ, expecting Google to meet or beat analyst expectations based on favorable developments with search ad payments. Despite lowering overall 2009 financial projections because of the recession and currency conversion rate issues, Google's "valuation remains compelling" and the analysts raised their stock price target from $390 to $410.

Ripple effects
Though Google's atypical business means it's hard to apply its fortunes to the overall market, its results have ripple effects.

For example, in the long run, the degree of Google's profitability could have repercussions for the company's high innovation rate. Google has shown the patience to invest in services that at least in the short run are money sinkholes. YouTube is the most prominent example, but newer arrivals include a revamped Google Voice, the Android mobile phone operating system, App Engine cloud-computing infrastructure, and Chrome browser.

A more restrained Google has cut several projects that weren't performing up to snuff, not just online services such as Dodgeball but also potential revenue-generation engines such as print and radio ads. And it's cut hundreds of employees through the process--nearly 200 in sales and marketing, 100 recruiters, 40 in a radio ad project, and an undisclosed number of contractors.

So far, the cuts haven't come close to the bone, but Google is being more careful choosing which projects to explore. Google now has "more focused resource allocations going into 2009...The review process is now a part of how we do business," said Jonathan Rosenberg, senior vice president of product management, as Google reported results from the fourth quarter of 2008.

For regular folks on the Web, that could mean fewer Google services or slower improvements to existing services. For competitors such as Facebook, Yahoo, or Microsoft, that could mean a little more breathing room, though of course no competitor is going to be complacent about the Google juggernaut.

Search ad questions
Google's reticence about financial performance and projections keeps people guessing about exactly how it's faring, and the present economic uncertainty compounds the situation. However, there are some data points worth noting.

First is, of course, how much people are searching. Each new search is an opportunity for Google--or search rivals Yahoo and Microsoft--to show an advertisement.

Next is ad coverage. Search engines must carefully balance showing ads more frequently, which can lead to more clicks on those ads and therefore more revenue, against showing them only when they're relevant to the searcher's query, which increases the likelihood that people will find the ads useful. Irrelevant or spammy ads instill the dreaded "ad blindness," in which people grow to ignore ads altogether.

Nielsen said searches grew 16.7 percent annually to 9.5 billion searches in March 2009, with Google outpacing the market with 27.6 percent growth to 6.1 billion searches. But upon seeing the more closely watched numbers from ComScore, JP Morgan analyst Imran Khan lowered his projections of Google's revenue and profit, and lowered his price target as well from $430 to $409.

"We think U.S. search performance will be weaker than previously expected," Khan said in a research note.

Cost-per-click declines
Bad news for search ad fortunes in general were results from Efficient Frontier, a search engine marketing company, which found that companies spent less per search ad in the first quarter of 2009. However, that effect was offset by greater search engine traffic and higher ad coverage, so it's not clear what the overall effect will be to Google and to search companies in general. The uncertainty is made worse by the fact that many statistics are only for the United States, but search and search advertising is a global business.

Finally, there's uncertainty about just how much effect Google's cost cuts are having. Khan estimates Google's expenses will be cut by about $450 million throughout all 2009.

Overall, though, there's no question that Google dominates a large and growing business. The troubles could be big or small, short or long, but Google's online cash engine remains stronger than those at Microsoft or Yahoo.

A search outsourcing deal with Microsoft could leave Yahoo with a little more cash in its wallet, potentially up to $1.3 billion more, according to a research report released Tuesday by Jefferies & Co.

With reports that Yahoo and Microsoft are holding preliminary talks to explore a search and display advertising partnership, Jefferies analyst Youssef Squali noted that such a deal could save the Internet search pioneer a tidy sum of money.

The parties could, for example, have Yahoo outsource its search infrastructure to Microsoft, and in turn, Microsoft would outsource its display advertising to Yahoo.

In his report, Squali noted:

Outsourcing the search infrastructure could bring Yahoo incremental savings of $1 billion to $1.3 billion. Finally, any upfront cash from Microsoft (as offered in July) could be deployed by Yahoo for either share buybacks or M&A.

Given the long-term importance of integrated search+display offering, however, we believe Yahoo would need to reserve the right to a) regain full control of its search assets in the future and b) maintain full access to search data in order to improve targeting of its display ads.

Meanwhile, if Microsoft where to split its display advertising revenues 50-50 with Yahoo, that could result in roughly $600 million to $800 million in incremental revenues to Yahoo. During the fourth quarter, Squali estimates Microsoft generated $300 million to $400 million in display advertising.

Updated at 11:36 a.m. PST with information on Google's share price performance and an analyst note.

Yahoo shares rose in morning trading on Monday on reports that the company is in preliminary talks for an advertising partnership with Microsoft.

Yahoo's stock was up as much as 7.6 percent to $14.49 in early-morning trading, a level it hasn't seen since early October. Yahoo's gains also went against the tide of the broader markets, which were down in morning trading.

The bump in Yahoo's share price follows reports on Friday that the Internet search pioneer has had discussions with Microsoft recently about such a deal.

Microsoft CEO Steve Ballmer reportedly remains focused on a search-advertising deal with Yahoo, but one that only goes so far and falls short of his .

Nonetheless, investors apparently were pleased at the notion that the two companies are at least sitting down and speaking with each other about a search-advertising deal or partnership.

The reported talks come at a time when Microsoft and Yahoo are seeking ways to narrow the gap with Google, which has a substantial lead over its competitors.

Google's slice of the U.S. paid search-advertising market is expected to perform on par or better than Wall Street expects, when it reports its first-quarter results on Thursday, according to a research report released on Monday by an Oppenheimer analyst.

In his report, Jason Helfstein notes:

We believe the Street expects U.S. paid clicks to decline; however, third-party data suggests first-quarter U.S. paid clicks increased 10 percent year over year, and coupled with recent cost initiatives, should result in upside to our and Street estimates.

Helfstein noted that he expects Google to report a 5 percent year-over-year decline in first-quarter paid-click revenues while third-party data indicates a 10 percent increase in year-over-year paid click revenues.

Shares of Google rose a modest 1.8 percent to $379.10 a share on Monday, while the broader markets remained under pressure.

Microsoft CEO Steve Ballmer once again publicly declared his interest in a Yahoo search deal, during a keynote speech at the 2009 Media Summit in New York.

And as with his past declarations of interest, Yahoo's stock responded. Yahoo climbed 4.84 percent to $14.07 a share in early morning trading.

Ballmer, according to a post in AllThingsD, had this to say about Yahoo and new CEO Carol Bartz:

I'm sure when it's appropriate, we'll have a chance to sit down and talk.

...Whether a deal gets done or not, who knows.

...There are a lot of things that are fairly compelling economically in trying to put our two search efforts together in a partnership.

AllThingsD points out as well that Bartz is also in New York this week.

For Google's executive management team, the $6.3 million in bonuses they received for last year's performance can buy a lot of Android phones.

Google, in a filing Tuesday with the Securities and Exchange Commission, noted its new chief financial officer, Patrick Pichette, received a $1.24 million bonus for his five months of work on the new job. For Pichette, he did not have to wait a full 12 months to become a Google millionaire.

Outgoing CFO George Reyes, meanwhile, received a bonus of $675,000. Over the past year, Google's stock has outperformed the Nasdaq.

Over the past year, Google's stock has outperformed the Nasdaq.

(Credit: Yahoo Finance)

Google's Jonathan Rosenberg, senior vice president of product management, received the largest bonus, with $1.64 million coming his way.

Rosenberg was one Google executive who was active on its fourth-quarter earnings call, in which the company exceeded Wall Street's estimates despite facing the headwinds of a dire economy.

Alan Eustace, senior vice president of engineering and research and development, and Omid Kordestani, senior vice president of global sales and business development, meanwhile, each received a $1.38 million bonus.

As with , Google's co-founders Larry Page and Sergey Brin, as well as its CEO Eric Schmidt, did not collect a bonus.

When Yahoo's new CEO Carol Bartz met with company Chief Financial Officer Blake Jorgensen nearly two weeks ago, she delivered him a pink slip, sources said.

And while Bartz has not given any indications of a front-runner CFO replacement, the expectation is it will be a candidate from the outside and, hopefully, soon, said sources familiar with Yahoo's thinking.

"The CFO position will be her decision to make, not the board's. She'll have an opportunity to build her own management team," said one source.

Microsoft, meanwhile, does not expect Yahoo's CFO search, nor the time it will take for a new CFO to become familiar with the company, to slow down any potential of landing a search deal with the Internet pioneer, said one high-level Microsoft source.

After all, in the last go-around when Microsoft announced its , it was Yahoo's treasurer who was actively engaged in day-to-day discussions, not Jorgensen or Yahoo's then-president, Sue Decker, said the source.

"I thought it was a little out of the ordinary, but not unheard of," said the source, adding, "Yahoo's treasurer was the one who had their hands all around Yahoo's business and their numbers."

Such an arrangement made sense, noted another source, given Jorgensen, who , was there for only seven months when Microsoft made an unsolicited offer to buy the company.

Yahoo's treasurer is part of the corporate finance team that Decker created when she was Yahoo's CFO. The corporate finance team, as with other large companies, is responsible for building financial models to assess valuations and methods of payment for deals and mergers and acquisitions, which Yahoo's corporate business development team may consider, the source said.

As a result, whether Yahoo has a new CFO in place, the company can still move forward in vetting any deal that Microsoft may want to put forward. The treasurer, Ron Will, is still in place, despite the restructuring announced Thursday, a company spokesman said.

It makes sense that Bartz would look at swapping out Jorgensen for someone who she will self-select, said Umesh Ramakrishnan, vice chairman of executive search firm CTPartners.

"Given the fact that Yahoo continues to be under pressure from Microsoft, it shows that the financial aspects of Yahoo are just as important as the products," Ramakrishnan said.

Although Microsoft is interested in a search deal with Yahoo, the two companies are not engaged in any active conversations, said the Microsoft source.

"If an effort is accelerated to engage in talks, it will be because of the CEO, not the CFO," the source added.

Twitter is working to convert its popularity into a business, and Google has shown that search can make money. So it's notable that Twitter is giving its search function new prominence.

Rather than consigning its Twitter search page to a separate corner of its Web site, Twitter has begun testing its use on the main Twitter.com page. "We've placed Search and Trends into the signed-in home pages of a limited set of accounts to get a better sense of how it works for folks before we release the feature completely into the wild," Twitter co-founder Biz Stone said Wednesday in a blog posting.

Twitter has begun testing search from its home page.

(Credit: Twitter)

Google has taken measures to make its search technology more responsive, with the Google News entries mixed into search results and the index able to include new sites within hours of their arrival. But Twitter search, while vastly more limited, is nevertheless a strong reflection of what people collectively find interesting in the moment. That, in turn, could be a nice avenue for advertisers trying to catch the latest trends.

Search guru Danny Sullivan likes what he sees, concluding that Twitter actually has something the big search engines lack, even if it's not enough to slay the rivals.

"I'm real big on Twitter search," Sullivan said last week at the Search Marketing Expo. He called Twitter search a "hyper-real-time tool to see what's being buzzed about."

Stone agrees. "Searching over Twitter messages is like a filter for what is happening right now--it's an interesting look into the real-time thoughts of people and organizations around the world. Whether you're curious about something specific or you just want to browse the trending topics, we've found that Twitter Search adds a new layer of relevance," he said in the blog post.

But here's the big caveat. Twitter has built a thriving community in part through its use of an open API (application programming interface) that lets people use a wide variety of software to publish and read tweets. Personally, I use Tweetdeck, Twhirl, Twidroid, and Twitterific.

That's great for letting people find the interface they prefer. But it also means that Twitter's Web-based interface, which changes at a glacial pace, is not the hub of activity for many active Twitter users. The more active you are, the more likely you are to use a third-party tool that can perform handy functions such as spotlight replies, track favored contacts, shorten long Web addresses, and show pop-ups of recent tweets.

The consequence: a lot of Twitter activity takes place beyond the confines of Twitter's Web site. That makes built-in Twitter search less directly useful as a potential avenue for revenue.

(Via Search Engine Land.)

Picture this: more venture funding for an advertising-related start-up operating in hard economic times.

Apparently, Tremor Media has gotten just that--to the tune of an $18 million third round of funding, according to a Silicon Alley Insider report.

Meritech Capital Partners led the round in the Web video ad network company, with existing investors Canaan Partners, Masthead Venture Partners, and European Founders Fund participating, according to the report.

Tremor Media, which provides advertisers with in-banner and in-stream video advertising on various publisher sites, has raised a total of $37 million in venture funding, SIA notes.

Tremor's funding comes as other Web video advertising players are looking to teach retool their delivery methods. Yahoo, for example, is gearing up to offer images and video as part of its paid search advertising results.

Yahoo, Microsoft, and AOL each carved out a little more U.S. search market share in January, but Google still had the biggest piece of the pie, according to a report Wednesday by ComScore.

Yahoo Web sites accounted for 21 percent of the market (up half a percent) compared to the month before, while Microsoft grabbed an 8.5 percent slice (up 0.2 percent), and AOL nabbed 3.9 percent of the market (a 0.1 percent increase).

Google, while still holding the largest slice of the market by far, accounted for 63 percent of the search industry in January, down half a percent.

One interesting observation from Silicon Alley Insider is Yahoo's consecutive five-month run in posting modest monthly gains in U.S. search market share.

In August, for example, Yahoo's market share stood at 19.7 percent, according to SIA. But in the past five months, it has steadily grown, garnering more than a 1 point increase during that time.