Why Google’s Core Business Looks Relatively Better Poised Going Into Q2

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Why Google’s Core Business Looks Relatively Better Poised Going Into Q2

Google missed analyst estimates of revenue, as well as EPS for Q1 2015, but there could be more to Google’s prospects going forward  than Q1 numbers would suggest.

For starters, Google has regained its overall search market share in the US  for the first time since the Yahoo Mozilla deal, albeit with a change in device mix and with a higher contribution from mobile. Further, the partial recovery of its lost search share on desktops, should aid monetization rates. Powered by these gains, and its focus on app distribution, Google seems to be better poised, going into Q2, and the rest of 2015.

A Quick Look At Google’s Key Q1 Number For Context

At large, revenue growth was a tad disappointing, albeit not for the first time in the last few quarters. What did strike me as a positive though, was the improvement in operating margins. Google’s operating margin for Q1 came in at 25.8%, marking an improvement over 22.5% in Q3 and 24.3% in Q4 2014.

As for net margins, the net margin of 20.8% was in line with the average over 2014, excluding the one-time gains from the sale of Motorola in Q4 last year.

The number I was most keen to see in Google’s Q1 earnings release, though, was paid clicks growth on Google sites. Just to aid unfamiliar readers, Google’s ad-revenue is a function of the average ad-price per ad clicked on by users (CPC) and the number of ads clicked on (paid clicks).

Those who follow Google’s quarterly results know that ad-prices or CPCs have been on the decline without respite for a long time now, with paid clicks holding up advertising revenue. In Q1 though, Google’s paid clicks growth became a measure of more than just that.

Why Paid Clicks Were Critical In Q1 2015

In November 2014, Mozilla inked a deal with Yahoo, to let the latter replace Google as the default search engine on its Firefox browser. Estimates across the board suggest that the move hurt Google’s search share in the US.

While StatCounter data suggests that Google gained search share on mobile devices since November, on an overall basis (combination of devices), Google’s search share remained below levels seen in November.

Secondly, and more importantly, what estimates from ComScore and StatCounter suggest in common  is a loss of search share on desktops.

ComScore’s search engine rankings for Dec (2014), Jan, Feb and March (2015) show that Google lost US search share to Yahoo on desktops, when compared to November 2014 (before the deal).

StatCounter’s data for US desktop search share differs from that of ComScore’s in terms of absolute numbers, which isn’t surprising, given that both numbers are estimates and possibly use different methods of estimation.

At large though, both numbers reflect similar trends, with desktop search share through Q1 being lower than November and December 2014 levels.

The impact of these developments is two-fold:

Since Google makes a lot more money per click on desktops, when compared to other devices, Google’s CPC’s are likely to have suffered a heightened drag in Q1.

Further, the lower overall search share is likely to have hurt the number of paid clicks.

Now, with weakening CPCs, the last thing that Google would want is to see a reduction in paid clicks, especially on Google properties, where it gets to retain all of the revenue generated.

What Paid Click Growth Suggests

While Google’s search share was first impacted in December last year, implying a partial drag on Q4 paid clicks, Q1 represents the first full quarter of lower search share relative to November.

However, Google’s paid clicks numbers for both Q4 and Q1 show strength, relative to November.

In Q4, Paid clicks on Google properties grew at an accelerated 25% over the year ago, compared to a 24% growth in Q3. What’s more, the 18% sequential (over the previous quarter) growth in Q4, outpaced the 16% growth in the December ending quarter in 2013. These numbers suggest that growth in paid clicks on Google sites was relatively stronger, both sequentially and compared to the year ago quarter.

As for Q1, paid clicks grew by 25% over Q1 the year ago, growing at the same pace as they did in Q4 2014.

Further, since Google’s overall search share in Q1 remained below November levels, sequential growth rates are worth looking at.

On a sequential basis, in Q1 this year, paid clicks declined by 3%, in line with the 3% decline in Q1 2014.

While Paid Clicks data is largely positive, for both Q4 last year and Q1 this year, growth in the number of paid clicks could potentially have been even higher, if not for the loss of US search share during these periods.

Google Has Regained Search Share

StatCounter data for April suggests that Google has not only regained its US search market share, but also surpassed it marginally. While Yahoo still holds on to some of its gains, Google’s recovery seems to have come at the cost of Bing, and other search engines.

Source: StatCounter

While this could aid Google’s paid clicks growth, going into Q2 this year, Google’s recovered search share on desktops in the US could aid CPCs.

StatCounter’s estimates for April suggest that Google’s US desktop search share during the month was higher than in December, and all of Q1, lagging search share in November by just a little over one percentage point.

Google’s Focus On App Distribution Augurs Well

In Feb this year, Google announced that it was pilot testing search ads in its Google Play store, to let app developers promote their apps. In addition to this, app download promotions have become a familiar sight in Google’s mobile search results.

App distribution is a significant opportunity for Google. According to a recent post on the Wall Street Journal, in 2014, game developer King.com, the maker of the popular game Candy Crush, spent $400 million or a fifth of its revenue on advertising. The report suggests that most of these spends were pocketed by Facebook.

The Google Play Store is where Android users are eventually lead  to download apps. If Google can manage to tap this potential at the source, it could make inroads into Facebook’s market.

Apart from unlocking a new revenue source, focusing on app distribution allows Google to challenge Facebook, which has clearly been gaining on Google in the online video advertising space.

Closing Thoughts

While Google’s revenue growth was a tad disappointing in Q1, there were some positives that emerged from its earnings release.

Outside of its financials, Google’s recovered search share in the US and its focus on app distribution augur well for growth in the coming quarters. As things stand, Google’s core business seems relatively better poised, going into Q2 2015.