And The Results Are In

A few weeks ago we talked about how the beginning of July marks one of several important dates for those who track financial performance, and this past week, the public companies in our sector report their second quarter numbers. Hearing how public companies do, especially those with similar businesses to our own, has always been of interest, as among other things it provides a benchmark by which non-public companies can compare. I don’t see Azoogle Ads and CPA Empire getting together over coffee and sharing how each performed in the quarter, but with Google and Yahoo, or Apple and Microsoft, as public companies they must disclose their financials whether they want to or not. Every quarter’s earnings carries significance, but this one especially saw intense scrutiny as types of people looked to gleam some insight into the economy through the companies’ results. With the focus on rising gas and the continuing housing slump, we saw investors cheer for many of the financial companies when news broke that while they lost millions if not hundreds of millions of dollars, they didn’t lose as much as many had predicted they might. The same though does not seem to apply to the technology sector. With stock prices for many still off twenty or more percent from where they began the year, they seemed to take an early beating even though analysts and pundits had predicted towards the end of last year that those in the technology sector would continue to charge ahead as they did for the majority of the past two to three years.

Technology stocks, especially those with relevance to Internet advertising, have certainly fared better than financial stocks, but as we see, they seem to get held to a higher standard. This week, we take a look at five technology companies second quarter results. This time around, it’s not so much about rivalries as it is about hoping we aren’t so bad off after all. And what we see is a mixed bag of solid numbers but missed expectations, poor numbers, and outperformance.

Google – For its first years as a public company, Google’s quarterly earnings became an opportunity for the shares to reach a new stratosphere. Since then, Google has settled into orbit, and its releases tend to bat the stock that much further out to space or send it hurtling to normalcy. Second quarters haven’t historically been kind to the stock and this one was no different. As the Associated Press reported, "The red flags raised after the bell Thursday included a dramatic slowdown in the company’s hiring pace and Google Chairman Eric Schmidt’s description of the economy as ‘challenging.’ Google’s chief economist, Hal Varian, even participated in the company’s conference call for the first time to discuss business conditions." Not many companies can talk about a challenging economy and still manage profit of $1.25 billion for the quarter, a 35% increase from the same time last year. Revenue rose as well, up 39% from $3.87 billion to $5.37 billion. Unfortunately, while the numbers matched or beat most analysts expectations, they didn’t beat them enough, and the companies shares lost 10% the next trading day. At issue, was the slowing growth in total paid clicks, part of which is intentional, but part certainly not. The company isn’t peaking, but it’s having to work harder to extract its growth (or screw its publisher harder).

Apple – While not technically in our sector, Apple has transformed itself this decade, and like Steve Jobs’ other home run, Pixar, seems to hit it out of the park far more often than any in recent memory. They have become not just a powerhouse in revenues and profits but also in shaping our culture. With the recent iPhone 3G and App Store launch, they could very well shake up mobile computing and mobile Internet advertising. Of note, the company shipped more computers than it ever had before, iPod sales rose by double digits, and the numbers don’t reflect the true impact of the iPhone. Profit topped $1 billion and revenue came in just under seven and a half billion dollars. High expectations, margin compression, and a modest outlook for the remainder of the year caused the stock to take a slap early the next day, but it recovered by days end.

Amazon – If you had to guess how Amazon did, you might have found conflicting thoughts. Higher gas prices mean people might shop online, but consumers have no money, so they won’t be shopping period, and if they do, perhaps higher gas prices that now account for higher shipping and handling would deter such spending. The pros outweighed the cons in Amazon’s case. The company’s profit more than doubled from the year before, reaching $158 million on enormous sales of $4 billion, a jump of 40% from the same period last year. The company has invested heavily in non-Amazon like items – cloud computing, and digital media distribution. They didn’t make up an appreciable portion of the business, but if this quarter shows, they keep making solid strides to becoming more than just a bookseller.

Yahoo – As though dealing with a tough economic climate weren’t enough, Yahoo had to contend with its ongoing drama of on again and off again acquisition talks, very public wrangling for control of its board, and scrutiny over its distribution deal with Google. Perhaps Yahoo employees, those still there at least, have become so numb that they don’t notice. As RBC’s Ross Sandler says, "Yahoo’s 2Q results were better than worst fears." That still necessarily imply stellar results. Their net income of $131.2 million is lower than $160.6 million a year earlier. Total revenue, though, rose 5.9% to $1.8 billion. Also interesting, their international revenue fell by 8% while domestic revenue rose 13%.

ValueClick – Om Malik, wrote, "Silicon Valley is in for a long-overdue reality check, one that should worry one and all. Why? Because the news coming out of advertising-focused companies is not good." ValueClick earned first mention in the article. The company saw revenue for the quarter between $163 and $164 million compared to the prior guidance range of $166 to $170 million, and while they beat profit projections, they lowered their outlook for the rest of the year, from $742 million to $665 million and full year profit from $192 million to $174 million. The actual numbers for the second quarter will come out at the end of this month. Like others, they too, say the weakening economy plays a large part in their lowered guidance. It’s been a tough time though for the company as their previous profit center, the incentive promotion campaigns, came under scrutiny and tweaks limited its growth became enacted to satisfy law makers. They face some uphill battles in their other units as well – competition from Google Affiliate Network, display ad weakness, and search revenue from one of Google’s non-favored nation programs, comparison shopping.

What can we make of the earnings? Well, it seems that much of what was predicted, logical, expected is playing out. The companies with the most levers to tweak their earnings fared the best (Google), as did those with a diverse revenue base, such as strong international revenue. Gas prices seemingly increased adoption of ecommerce, benefiting Amazon, and consumer spending while lighter isn’t completely dead (Apple). The first to fall are those who haven’t invested as heavily in technology, who don’t have as diverse inventory sources, and whose businesses operate relatively straightforward. In this case, that’s display advertising. Display companies have a higher than average reliance on brand advertisers, a much less diverse advertiser base, and small changes in both advertisers and inventory can have substantial impacts on the business. That’s what happened to Yahoo and Valueclick. What it tells us is not that Google is immune, but that Google is further away from the splash in the water. The ripples will hit them, but it will simply do so later. Alas, we won’t really know what to make of these results until at least the next quarter but probably the end of the year. That’s when we will see if display companies have stemmed the bleeding and whether water snuck into Google’s ship. If you are an ad network, though, this is an opportunistic time. Google continues to squeeze more and more from it publishers, so the environment is right for a new entrant to grab market share.