Google Inc CFO George Reyes cautioned yesterday during an otherwise bullish trade-show presentation that the company’s core online advertising revenue growth may continue to slow, forcing Google to look elsewhere for gains.
Reyes’ comments, which were webcast live and available for replay on Google’s web site, sent Google’s shares down more than 7%, or $27.76, to close at $362.62 on the Nasdaq yesterday.
Reyes said, at a Merrill Lynch Internet advertising conference, that Google’s core search advertising business, which drives between 97% and 98% of its revenue, would grow with the broader market rather than as a result of the company improving its technology.
Leading up to last year’s third calendar quarter, Google spent about 18 months on a revenue force initiative, which involved a dedicated team of engineers working to tweak and optimize the company’s search ad business. And that sort of paid off nicely with the fruits of that labor, Reyes said.
But since then, most of what’s left is really organic growth, which means you have to grow your traffic and you have to grow you monetization, he said.
So, I think now, clearly our growth rates are slowing and you see that each and every quarter. And we’re going to have to find other ways, you know, to monetize the business.
Reyes comments came during a question-and-answer session following his brief, upbeat presentation on innovation at the company. Reyes was asked to provide color on the company’s business during the third quarter, which led to Google’s revenue slow-down in the fourth quarter.
Reyes’ comments, which were widely reported, may have sparked the sell off on Wall Street because the company has an unorthodox policy of not commenting on financial targets.
After answering a succession of questions not related to the growth of its core business, another analyst later asked Reyes to elaborate on his earlier comments.
The only clarification that I would offer up is we’re getting to a point where the law of large numbers starts to take root, he said, and I think we ended the year with $6bn in revenue, which is nothing shake a stick at, but at the end of the day growth will slow.
Will it be precipitous? I doubt it. Are there more things we can do to improve revenue performance? Probably, he said. So, I’m not turning bearish at all. I think we have a lot of growth ahead of us, the question is, At what rates?
He later said there was still headroom left in pricing for its advertisers.
When asked whether Reyes saw something in the current quarter that would prompt a revenue slowdown or if he was talking the law of large numbers, generally, Reyes simply responded, Law of large numbers.
Reyes also was asked about the rate of growth of some of Google’s newer businesses, such as Google Mobile, Google Local and Google Analytics, which Reyes identified as having high growth opportunities.
We will see meaningful contributions from some of the new things we are working on, he said.
However, Reyes offered little insight into how the company plans to create new ways to monetize outside its core search ad business, beyond its strategy of improving the search experience.
The better the quality of your search results, the better the quality of your ad results and the higher the click-through rate, he said. Improving the quality of search and the quality of ads trumps almost all else that goes on in the company and those are pure technology investments.
Reyes did not mention Google’s new payment feature on Google Base. A posting on the Google Base Blog on Friday showed the company had added a new e-commerce feature that allows merchants to deal with payments through a customer’s Google account.
When asked whether Google would consider offering consumers incentives to search on its web site, as its rivals Microsoft and Yahoo have done, Reyes said Google plans to remain true to its principals of delivering a good search experience. That will trump any incentives, any rebates, he said.
Reyes said the company’s management team often is asked about its risky strategy of relying on its core search ad business for virtually all its revenue. At some point in time we will diversify, he said, but currently the opportunities in search were immense.
People believe we’re still in the very early innings of search penetration and the evolution of search, he said.
Earlier, he pointed out that Google was not risk adverse. One of the many examples Reyes said he could cite was when, in 2002, the company launched its AdSense partnership program, first for search and then for content. AdSense enables merchants to display relevant Google ads on their website and earn money.
We had roughly $100m in the bank, yet we went out and extended very substantial, long-term guarantees well in excess of that, he said. Of course, the bet paid off and Google was able to monetize the business beyond our expectations, Reyes said. This is the sort of trait that we’d like to keep alive and well in the culture.