I got Google’s Q2 07 earnings release today about 20 minutes before the search giant held its analyst call and started plugging the new numbers into my spreadsheets. Once I did that, however, something didn’t look right.
Based on the Q2 07 financial data, it seemed to me that Google’s growth…is slowing. I thought to myself, “this is weird” because Google has never posted a slowing growth rate — whether measured on a seasonal basis or even absolute basis. I checked and rechecked, but, once the analysts began asking questions on Google’s call, I knew my numbers were right. No matter how you slice it, Google’s growth did cool slightly during Q2 07.
The biggest concern to investors is a drop in Google’s operating income. Although CEO Eric Schmidt has in the past promised that Google would continue to post quarterly gains in operating income growth, operating income actually dropped from Q1 07 to Q2 07, slipping by 10% from $1.22 billion to $1.1 billion.
During the earnings call, Schmidt said the cause of the decline was a too rapid growth in headcount. “We overspent on our plan in terms of headcount,” Schmidt explained. It is true that Google’s headcount soared by 74% from Q2 06 to Q207, rising from 7,942 to 13,786.
As a consequence, Google’s operating margin, the difference between its revenues and operating expenses, was the lowest it has ever been since the company went public, a modest 29%.
The rapid rise in headcount probably does explain most of the drop in operating income and margin, but revenue growth was off during the quarter too. Although Google’s revenue growth was a healthy 58% year-over-year, climbing from $2.5 billion to $3.9 billion, revenues grew by only 6% from Q1 07 to Q2 07.
Admittedly, the second quarter is always weak for Google and for Internet advertising generally, but still, that 6% sequential quarterly growth is the lowest growth rate Google has ever posted.
Don’t get me wrong. Google is a very, very healthy company and it’s amazing that Google is continuing to post growth, albeit at a slightly lowered rate, after the scorching hot two years it has had. Unless Google were capable of infinite growth, which no company is, it was inevitable that the company’s growth jets would cool.
Company execs said during the earnings call that Google’s somewhat sluggish revenue growth rates reflect the fact that Google jettisoned some inefficient advertisers and ad outlets, resulting in lower but better click-throughs. The lower-but-better click-throughs were not, however, compensated for by increases in ad rates, something that Google could adjust for in the future.
But, even if Google does twiddle with some ad price levers, don’t bank on the kind of overheated growth that Google has experienced in the past.
Posted by Cynthia Brumfield at 5:45 PM | Print | Comments (0)
The big news for today is the launch of an ambitious VoIP provider called Ooma. Walt Mossberg reviews the $27 million-backed start-up’s service here and is generally positive. Mike Arrington has a relatively star-struck overview of the service here. Ashton Kutcher (yes, that Ashton Kutcher) is the “creative director” for the company and Arrington managed to land an interview with Kutcher and CEO Andrew Frame.
The normally no-nonsense Om has a somewhat breathless piece about Ooma here.
Ooma’s sales proposition in a nutshell: buy a $399 device that delivers voice calls on a P2P basis and get free phone calls in the U.S. An optional device allows consumers to make free phone calls throughout the house.
Hello? Have these usually shrewd people suddenly become babes-in-the-woods? Vonage is about to go belly up, weakened not only by litigation but also slowing subscriber growth, Skype’s usage is flattening out and SunRocket simply gave up the ghost last week. And those are the success stories in the third-party provider VoIP business.
Although all three touch upon these flame-outs, they’re basically denying reality because…Ashton Kutcher is pitching the service?…the technology is admittedly kind of cool?…some very prestigious money-men (Draper Fisher Jurvetson, the Founders’ Fund, Draper Richards, WI Harper and Worldview Technology Partners) are backing the start-up?
Why in the world would consumers pony up a hefty $399 for an Ooma box, when they can make free phone calls today using Skype and Skype ain’t doing as well as it should? Granted, Ooma may be easier to use — plug-and-play device, and all — but the DBS business and the cell phone industry learned long ago that forcing people to plunk down hundreds of dollars in upfront capital is a non-starter. It’s a big upfront barrier to adoption and one that Ooma will have to overcome if the service is to succeed.
But Ooma’s chances of achieving success are very, very small indeed. The fundamental problem, the one that is making even independent VoIP success stories look like utter failures, is that cable operators and phone companies offer triple-play packages of voice, video and data services, and the costs (at least right now) to consumers are relatively low in bundled packages.
It’s so easy for consumers to call their phone companies or cable operators and get an all-in-one voice, video and data package that starts at $99/year. Most don’t care that unlimted voice service may cost them $30/month — they still remember phone bills that topped $100 per month when long-distance voice service was an expensive thing. It’s just easier and, to many consumers, more reliable to tap their local cable and phone companies.
While a few geeks might go for Ooma, don’t expect a mass adoption of the service.
Posted by Cynthia Brumfield at 9:59 AM | Print | Comments (1)
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