Susquehanna Financial Group analysts Brian Nowak and Michael Costantini highlight the catalysts for positive advertising and earnings revisions for Google Inc (NASDAQ:GOOG) as they host a conference call with the Rimm-Kaufman Group (RKG) discussing the latest paid search trends.


Call to action

We are bullish on Google Inc (NASDAQ:GOOG) into 4Q earnings on 1/30 as our industry conference call reaffirmed ad growth remains solid (and accelerated), Product Listing Ads (PLAs) are driving dollars onto Google, and pricing is moving higher. New cross-device measurement is also finding more conversions, which over time should be positive to ad growth.

Highlights from the paid search trends

We recently hosted a conference call with the Rimm-Kaufman Group (RKG) discussing the latest paid search trends; the following is an edited transcript and ensuing investor questions.

Google’s ad dollar growth

RKG client spend on Google Inc (NASDAQ:GOOG) accelerated from +18% YoY growth in 3Q to +19% growth in 4Q. This implies a 200bp acceleration on a two-year stacked basis. While only one sample, this is consistent with our other agency checks indicating strong 4Q Google ad dollar growth.

PLA pricing higher

PLAs were the main driver of RKG client GOOG spend growth in 4Q. PLA 4Q CPC pricing was 13% higher than non-branded text ads, after being at parity in 3Q. This is the first time PLA pricing has been above non-branded text ads, and PLA ROI is still 18% higher than non-branded ad units. This means there is more upward pressure on PLA pricing to come.

Smartphone CPCs steady at 40% of desktop

RKG client smartphone CPCs in 4Q were roughly steady with 3Q at ~40% of desktop levels. Smartphone revenue per search (RPS) is improving from Enhanced Campaigns (from 25% of desktop in 3Q to over 30% of desktop in 4Q), but in our view, smartphone CPCs are likely to stay at a discount to desktop for some time given the lower conversion. It’s important to remember that CPCs are better viewed as outputs than inputs, and ad dollars moving onto Google’s platform are a better indicator for the health and trajectory of the business.

Cross-device measurement showing 20-30% more conversions

RKG has been testing Google Inc (NASDAQ:GOOG)’s latest cross-device measurement tools and early results have been positive, finding an incremental 20-30% conversions for the same mobile ad spend. Longer term, this has the potential to be positive to ad growth and smartphone CPCs, but for now (even in 2014 budgeting), clients remain reluctant to fully incorporate the new Google-based cross-device estimates due to uncertainties around accuracy. Like Enhanced Campaigns, we expect this to be a multi-quarter (and year) adoption process.


Positive advertising and earnings revisions.