Google ad slump spreads abroad
Hit by the widening advertising slowdown, Google's weaker numbers show the search sector is on a steeper slide.
NEW YORK (Fortune) -- In the clearest sign yet that online ad sales growth cannot outrun a global economic slowdown, Google reported the first-ever sequential quarterly revenue decline in its U.K. business. The dip, as reported in the company's second-quarter earnings Thursday, cut into Google's overall international growth, bringing it down to 52% from 55% in the first quarter.
That's unsettling news for Google and the search sector, since overseas growth has previously been the crucial area that has helped Google strongly offset the ongoing U.S. slump.
Microsoft didn't help lift any of the gloom in the online advertising picture. The software giant saw online ad sales grow 18% over year-ago levels, a big drop from the 39% growth rate it had in the prior quarter. Microsoft also stretched its marketshare losing streak to "four straight months," according to Morgan Stanley analyst Adam Holt.
Google has been the beneficiary of Microsoft's lost business, but it has not been enough to balance the declining industry growth. Overall, Google's ad sales growth has slowed by half in less than two years, and with international ad sales, its strongest growth engine, starting to ease, the trend is likely to steepen.
Google (GOOG, Fortune 500) shares fell 9% Friday after the company missed Wall Street's profit targets. And Microsoft (MSFT, Fortune 500) was down 8% with a miss of its own coupled with lowered guidance for the current quarter. And also on Thursday, another online advertising player pulled up lame. Net bargain finder ValueClick (VCLK) cut its 2008 sales target 10%, blaming a weakening economy.
Analysts were quick to point out some of the key factors that tainted Google's results. For example, a big portion of Google's profit shortfall in the quarter came from a 57% drop in interest income. Google used $3.2 billion of its invested cash to buy DoubleClick in March, bringing its interest income down to $58 million from $137 million in the year-ago quarter.
But the sales performance revealed new pockets of weakness. In the U.K., where mortgage woes have started to pull down the economy, revenue growth was 29%, down from the 39% pace in the first quarter and well off the 44% growth from the fourth quarter, Citigroup analyst Mark Mahaney noted in a research note Friday. The U.K. makes up about 14% of Google's international sales.
On a conference call with analysts Thursday, Google CEO Eric Schmidt said that while prospects may be dimming he liked Google's chances.
"There is obviously evidence of a slowdown in the U.S. and Europe; you read it in the paper every day. We continue to believe that we are very, very well-positioned in such a slowdown and especially if it gets worse," Schmidt said, according to a transcript published by SeekingAlpha.com.
Google also blamed some of the problem on its own efforts to try and charge more for fewer, though more targeted ads. Pointing out that the number of Google search ads is "pretty much at an all-time low relative to the last few quarters," Google product manager Jonathan Rosenberg said, "that's basically our continued focus on quality. I don't really see that changing significantly."
Google president Sergey Brin added that the company pulled back a little too far. "There was some evidence internally that perhaps we were a little overly aggressive in decreasing coverage in this past quarter," Brin said on the call.
Looking ahead to Yahoo's scheduled earnings report Tuesday, some analysts have recently lowered their expectations for the No. 2 search shop. Citing slowing U.S. searches, and declining marketshare in "an increasingly difficult advertising market," Soleil analyst Laura Martin cut her Yahoo (YHOO, Fortune 500) second quarter sales estimate to $1.37 billion.
The analysts' consensus estimates for Yahoo's second quarter calls for adjusted profit of 12 cents a share on $1.37 billion in revenue. That compares with 11 cents on $1.24 billion in sales in the year-ago period. 
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