Why YouTube is going from strength to strength

21 Jul 2015 | Author: | No comments yet »

Google’s Revenue Growth Even Stronger When You Peel The Onion.

New Google Chief Financial Officer Ruth Porat, who joined the company from Morgan Stanley in May, had a good first earnings call today. Google shares are at record highs, but advertising with the search giant is cheaper than ever—or at least that’s what the company’s own numbers indicate.Google (GOOGL) shares are down $16.50, or 2.4%, at $683.10, following its huge run-up on Friday, on the heels of its Q2 report and encouraging words from CFO Ruth Porat.Shares of Google Inc.’s stock closed at a record $699.62 last week, adding $66.9 billion to its already enormous market capitalization in just one day — a record for Wall Street.Google reported net revenue of $14.35 billion vs. the Street’s estimate of $14.28 billion (net revenue removes the Traffic Acquisition Cost or TAC) from the company’s total revenue of $17.7 billion so net revenue didn’t beat expectations by very much (0.5%).

The stock has gotten yet another price target increase this morning, from Argus Research’s Joe Bonner, who has a Buy rating on the shares, raises his target to $850 from $675, above the Street average of $730.60 according to FactSet. What is written in Google’s press release and reiterated by most of the analysts is that total revenue grew 11% year over year and 18% when the currency impact is removed on total revenue (and ignored by at least one sell-side analyst in his summary note). During the earnings call, Google’s chief business officer Omid Kordestani said that YouTube is now bigger than any individual U.S. cable network for the key demographic of 18-49 year olds. Brian Wieser, a New York-based analyst at Pivotal Research Group, tried to fill in the blanks, starting with Google’s indication watch time on YouTube has risen 60 per cent on an annual basis and mobile watch time has more than doubled in the past year. However I believe this analysis understates Google’s revenue growth in the quarter and is one reason (along with better click growth and cost discipline hints) that the stock increased by almost $100 per share to $699.62 on Friday.

During the call she said that the cost-per-click, or CPC, of mobile ads has risen and that desktop CPC has held steady. “We continue to close the gap between mobile and desktop search monetization,” she said during the call. Let’s take a look at Google’s corporate philosophy to see how the company is trying to solidify its current success, while simultaneously taking the moves that will transform its business. While executives initially blamed foreign exchange costs, and later a mix of factors including emerging markets and ad quality changes, analysts wondered if the shift from desktop to cheaper mobile ads was gradually undercutting the company’s core business. Rather, it used portions of its insane cash proceeds to (a) roll out an impressive array of new online services to complement its massively successful search business, (b) acquire many established companies (e.g.

Investors have been enthusiastic over the notion she might instill greater spending discipline, and possibly dislodge some of its $70 billion in cash. But the CPC is an average across Google’s diverse advertising options, and it doesn’t give a clear picture about how individual businesses are performing. Finally, she seems to have an open mind about dividends or share buybacks, though we think some recent news reports may have exaggerated her enthusiasm. Executives have repeatedly said that looking at the CPC by itself is misleading, and trying to pin down one individual cause—like mobile—is misguided. “The key thing to understand is that we believe that shifts in CPC, or paid clicks taken independently, simply don’t reflect the fundamental health of our business,” said Patrick Pichette, Google’s CFO in 2011, when the drop began. As Google has transitioned to a unified advertising model across both desktop and mobile devices, we have seen a decline in cost per click, though the decline has been moderating.

The first layer of the onion to peel is to look at the hedging impact on Google’s revenue since the company’s hedges mitigated $471 million or 30% of the dollar’s impact. Digital Trends also pointed out that the number of publishers that are generating a six-figure sum from YouTube has increased 50% year-over-year. “We’re also seeing great adoption of our video ad formats like TrueView, and continue to help marketers engage and connect with consumers in new ways. Some of that improvement was due to warmer weather compared to the first quarter: People aren’t doing as many searches for shopping or dining out when they’re snowed in.

Google’s growth has been driven by its ability to accelerate revenue as advertising dollars shift to the internet, as well as by its extraordinary positioning as the search engine leader. But he also pointed to some of Google’s new offerings that help businesses quantify offline sales that result from online searches—claiming, for example that one-third of Target’s mobile ads resulted in in-store sales. Since adoption of mobile broadband is likely a major driver of viewers on the video platform, the analyst assumed somewhere around the 73 per cent growth rate in global internet access also applies to YouTube’s unique users. And for our top 100 advertisers the average spend per advertiser is up over 60% year over year,” said Kordestani. “We recently introduced a new feature for TrueView that allows brands to automatically insert product information, images and pricing into their video ads.

Google has ramped up hiring and made acquisitions in order to expand on its core internet search business and to develop fast-growing businesses like mobile and local search. As futurist Alvin Toffler said once: “The illiterate of the 21st century will not be those who cannot read and write but those who cannot learn, unlearn and relearn.” Many of the ideas Google is exploring are moonshots –audacious innovations that have a slim chance of succeeding but might revolutionize the world if they do. And as advertising increasingly shifts towards programmatic buying, brands can now easily buy TrueView ads programmatically through DoubleClick Bid Manager.” According to The Wall Street Journal’s sources, YouTube posted revenues of about $4 billion in 2014 — up from $3 billion a year earlier.

These investments have led to margin compression in recent quarters, though the company has maintained its dominant market share in core search and ramped up its display, YouTube, and mobile businesses. As for the low CPC numbers, Porat again pointed to YouTube, which is making up a much larger percentage of overall paid clicks while remaining less expensive than other Google ads.

ZenithOptimedia estimates that the average person globally watched 180 minutes of TV per day in 2014 – 7.7 trillion viewing hours – putting YouTube’s 170 billion hours at 2.2 per cent of this figure. Too much stretch, and the strategy ambitions will become complete hallucinations; too little stretch, and complacency inevitably creeps in; leaving the company to miss opportunities that require more audacious thinking. Its advertising business generated $62.4 billion in revenue for the trailing 12-month period ended June 30, up 33% from the same period two years before. To manage this tension, Larry Page, the CEO and cofounder of Google has given considerable thought to how one should evaluate and prioritize innovative ideas for investments.

Digital performance marketing agency iProspect saw a similar trend with its client set (mostly large U.S. advertisers) last quarter—with mobile CPCs passing 70 percent of desktop CPC compared to about half the value last year. He has outlined three basic questions anybody within Google or the broader business community, can reflect on, when making choices about the relative merits of candidate moonshots. Wieser is confident YouTube will capture a portion of TV budgets from advertisers seeking to extend their reach within specific audiences and those less concerned about content quality. Those questions are: Obi Felten works for Google X, the semi-private innovation lab that is exploring the craziest ideas for new business development within Google. As can be seen in the chart below the Euro started its steep decline in July last year and didn’t start to stabilize until the late January/February 2015 timeframe.

While the impact should be less in the second half of this year it will still show up in company’s results if foreign currencies stay pretty much where they are. Demand for YouTube ads will also grow as advertisers learn how to use them effectively, said Hull. “You only have a few seconds to get someone’s attention or they’re going to skip—this isn’t just like buying TV space on a new channel, it’s a different medium,” he said. “I think the CPCs are still low because not every brand is doing that yet.

Her LinkedIn profile says she helps inventors, scientists and engineers at [x] to turn science fiction-like technology into real world products and businesses. Some children now associate watching TV as “punishment.” Ruth Porat told investors that Google’s GAAP basis operating profit was $4.8 billion and the operating margin was 27%. The longer you put off that learning you will unconsciously put off that news because it is disheartening to hear that what you have been working on is not working. Innovators accept things will never work exactly as planned; rather than stopping their efforts when difficulties emerge, they pause to interpret these “surprises” (what is the market telling us?) and adjust the course of ongoing innovation efforts.

Porat tried to split the difference on last week’s call, describing “our obligation to pursue activities that maximize value over the long term, and doing it in a disciplined fashion.” Striking that balance won’t be easy. As Henry Ford famously noticed: “If I had asked what my customers wanted, they would have said a faster horse.” Rather, Google encourages its employees to “live in beta,” and experiment solutions in real-time rather than intellectualize them to death at the start. That’s how Googlers get to know customers; that’s how they find out what they want; and that’s how they innovate. 5. “We’re always looking for new places where we can make a difference. Ultimately, our constant dissatisfaction with the way things are becomes the driving force behind everything we do.” The development of computers, robots and other digital technologies is creating massive opportunities for Google.

This is no easy quest, and while Google coddles his employees with a ton of luxurious perks like free food, free haircuts, and even…heated toiled seats, it also does everything it can to ensure people “stay hungry” and go the extra mile. When it interviews new potential hires, it asks “If you could change the world using Google’s resources, what would you build?” Performance evaluation schemes are not just assessing what was accomplished during the year, but also what comes next: “Are we taking advantage of what we’ve got here?

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