Google's Earnings Controversy (GOOG, YHOO, BIDU)

This afternoon’s earnings report from Google Inc. (NASDAQ: GOOG) is perhaps one of the most anticipated earnings releases so far this earnings season for Q1-2009.  Google could steer almost every tech and media company after the report as it is still one of Wall Street’s darlings.  But the most correlated are likely to be Yahoo! Inc. (NASDAQ: YHOO), Baidu, Inc. (NASDAQ: BIDU) and more.

The consensus estimate from Thomson Reuters for Google now looks to be $4.93 EPS, up from $4.91 just two or three days ago.  This may represent annual growth of just over 1% for this particular quarter, but that was after Google significantly beat projections a year ago.  This has also come down from estimates of $5.08 about 90 days ago and even more from when that bloodbath in late 2008 came upon us.  More important than anything, this would represent a very slight drop to the $4.95 reported last quarter sequentially.  By our count, third current estimate means Google could post its first sequential earnings decline on a per share basis since its IPO.

Google’s ex-TAC revenue projections for a consensus estimates looks to be $4,08 billion.  The company does not give forward guidance so all forward growth comments have to be taken from executives in the press release and in the conference call.  For the long-term, analysts are still looking for 16% growth from 2009 to 2010, and you might expect to see this being the biggest at-risk or cornerstone trend numbers depending on what happens with ad spending.

You have probably noticed how more and more agencies keep cutting advertising projections for internet and print and media advertising for 2009?  It has not shown up deeply so far at Google and its analyst estimates, but logic might dictate that even with a greater than 70% share of online search that there is no immunity out there.  The company even capitulated to this notion in recent weeks.  There is also the stock performance as it has run literally $100 since the rally began.

The options traders are probably a bit harder to use any time value today because options expiration is just tomorrow.  It looks like traders have factored in a move of up to about 8% in either direction.

Despite the rally we have seen, we really want to highlight something here that many analysts and the recent cheerleaders may be overlooking.  Its search share has continued to grow but has reached a point where it may be petering out, although this depends upon which metrics you use for measurement.  Online ad spending on the “CPM” basis has come down more sharply than what analysts have modeled in by our own observations and discussions with other new media companies.  This took place the entire quarter and came down sharply from Q4-2008.  The caveat here is that there has been a firming since the end of the quarter.  In fact, we would be shocked that even if the company confirms how light many advertising “CPM” models were in first quarter there was a firming in the last two weeks.

To track this notion of slowing ad spending, we will be paying close attention to the total revenues versus ex-TAC revenues, because something does not seem to add up here if there is a huge upside surprise.  We are not going to outright accuse Google of anything, but let’s just say that we are not alone in having some serious questions for some of the issues we are seeing in the Google ad model and the race to the free Internet and its domination of the space.

But all personal observations aside, we have noted how the bar for earnings is set extremely low.  This could create what we refer to as a “fake upside surprise” because all companies do right now is come close or lightly do better than estimates.  These estimates have come down so much for many media and technology companies that an “earnings beat” here from the leaders seems almost easy.  Our observations on this advertising rate issue may actually be irrelevant to the company’s earnings report or at least the reaction from traders.

You know what we are looking for now.  There is a real split here depending upon the preview.  Most traders have developed a bullish sentiment, and most publishers and content or site owners who use AdSense are leery.  We do not want to look in the rear view mirror here over the quarter.  If the company can convey the message that everything has stabilized on the “CPM” advertising side, then all of our observations on the “CPM” model will be largely irrelevant.

JON C. OGG