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Friday, October 17, 2008

Google 3Q:2008 results

Google missed consensus revenues by a little bit. TAC ratio was constant vs last quarter. The tax rate was 24% which was a little light relative to some models and bolstered profitability. The real surprise came on the cost front, where Google really put the clamp down on expenses. They indicated it was likely temporary and that they intend to continue to spend.

A few months ago, I highlighted an article in the NY Times about Google jacking up prices on day care and Brin objecting to some of the perks employees were provided. This did indicate a change in the way Google was approaching their costs. I also think it indicates they're seeing some writing on the wall in terms of profitability going forward. They're not going to have the same kind of heady growth indefinitely. Social networks have been disappointing relative to their hopes. Youtube has had to backtrack on promises of no ads in the content because they couldn't figure out another way to monetize it. Things have not gone exactly as planned.

Surprisingly, with finance and automobiles making up such a large portion of online ad budgets, they saw no visible reduction in business. I wonder, though, how much business in those verticals has slowed since the end of the quarter. The psychology out there is that consumers will not spend because of fear – shouldn't that suggest lower ad budgets heading into the holidays? What's the point in a lot of advertising if its not driving sales? Recently, the head of GM's ad budget said they would be cutting back on online advertising in absolute dollars for the first time ever. If asset prices are falling everywhere, I would think keyword rates are going to fall also. That would erode Google's profitability at its core.

They're very clever guys. They saw the need to cut back on spending before it blew them up in the quarter! That's really good stuff. I doubt they can continue to pull rabbits out of their hat if the core business keeps slowing… and it should with consumers so scared.

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