ResearchGoogle Q1 Earnings: A tale of two quarters

Google Q1 Earnings: A tale of two quarters

Apr 29, 2020

Google rose +8% after hours on Tuesday after reporting a Q1 that showed better trends on the ad revenue front than many analysts feared.

That said, hashing out exactly where true consensus expectations were at was difficult coming into the quarter given the (understandably) wide range of Q1 forecasts published.

Takeaway:

Despite the slowdown in ad revenues, we were pleased with Google's relative resilience in Q1.

With increased cost discipline and accelerating adoption across both major and smaller digital platforms, we see Google as very strongly positioned for a rebound coming out of the current global economic slowdown.

What we liked:

Strong activity growth across multiple key properties

Google reported seeing a surge in Youtube watch times, Google Play app store downloads, Chromebook demand, and perhaps unsurprisingly, 30x growth in its video conferencing platform Meet, which now boasts a daily active user count of 100 million users - or roughly a third of what Zoom recently announced.

Youtube's performance was particularly impressive as it saw its revenue growth actually accelerate in the quarter to 33% year-over-year, at a time when advertisers are broadly cutting spending across the board.

We believe this performance was driven by the strength and attractive ROIs of Youtube's direct response ads, which engage users with interactive / tappable calls-to-action, as opposed to traditional video ads that are simply viewed.

Accelerated adoption of smaller growth platforms like Classroom

The newfound economic reality has accelerated consumer and enterprise adoption of several of Google's smaller platforms as well.

For example, usage of Google's education platform, Classroom, has doubled since the beginning of March, with the platform now being used by over 100 million students and teachers.

Google also reported seeing businesses accelerate their shifts to the cloud, as previously theoretical side projects like virtual showrooming have become legitimate business model adaptations in the wake of social distancing.

What we didn't like:

Slowdown in ad revenue despite increased search activity

While total revenues grew 13% year-over-year in Q1, this represented a several point deceleration in annual growth, as well as a double-digit decline vs. the prior quarter.

This of course was primarily on account of decreased advertising spending across the board. While search rates have increased, they're also less commercial in nature, leading to a double whammy in the form of decreased budgets + decreased monetization potential.

Little clarity on outlook

While Google hinted at seeing "some early signs" of a recovery of commercial behavior in consumer search patterns, it wasn't able to offer any further indication of how the business could track going into Q2 and the rest of the year.

While these are obviously uncertain and unprecedented times, at a minimum more clarity on how the first month of Q2 has tracked would have been helpful for investors who are seeking more guidance in this rapidly shifting environment.

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