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Wall Street's Focus Shifts to Earnings


Google kicked off the latest quarterly earnings season with a thud, but all is not lost.

As usual, most media companies will report earnings several weeks after the first results hit. Nevertheless, a few early reporters have offered some clues of what to expect. I think the clues suggest results will be in line at least with analyst expectations.

The highest profile early reporter is Google (GOOG). For the second consecutive quarter, Google's report was greeted rudely with the stock diving almost 9% in the two trading days after Thursday's post close report. However, unlike last quarter, there was no serious disappointment with the quarter. Revenue and EPS matched expectations and revealed that Google continues to grow at 25% a year, a very healthy rate for such a large company. Cost per click again fell sharply, down 12%, but this was offset by much better than expected search volumes, up 38%. Google explained that mix shift to mobile and tablets and emerging markets and foreign exchange are pressuring CPCs but CPCs are not at all representative of the health of search market. I think the biggest positive coming out of the quarter is that the Street seems to buy this argument. The stock sell-off had more to do with technical considerations and concern about the 2-for-1 split the company announced.

By technical, I mean that Google shares had rallied sharply into earnings right to its multi-month high. This raised the expectation bar such that the company needed to exceed expectations for the stock to respond positively. I thought an inline report would be good enough and was surprised by the quick, sharp drop. Once the momentum turned lower, the selling fed on itself, particularly with Apple (AAPL) also dropping quickly, down 10% in a five day slide. The combination set off a rotation as money managers took profits in Apple, Google, and major technology ETFs.

Google's stock split has proved controversial although I am not exactly sure why. The company is creating three classes of stock. For the first two, Class A and Class C, the company is effectively splitting its stock 2-for-1 by issuing one share of new non-voting stock for each share of voting stock already held. The voting stock is what currently trades every day. The third stock, a "super voting" Class B stock that does not trade will have 10 votes per share and will give Google's founders voting control over the company.

There is no change in the economic ownership or voting control of Google as a result of the split. My first reaction was that Google might have a large acquisition in mind and did not want to dilute its founders' stake if it used stock for the purchase. This is a legitimate concern and I think it is partially responsible for the drop in the shares. Mostly, though, institutional investors just don't like being treated as second class citizens. Their commentary served to sour Google investors. Overall, the split created controversy that took the focus off a decent earnings report but I doubt it will have lasting impact.

As noted, Google's report indicated a healthy market for search and display advertising. This doesn't directly apply to other advertising media but I think it provides an initial sign that advertiser demand was healthy in 1Q. We also heard from Gannett (GCI) and Omnicom (OMC) this week. I think their results also provide a comforting read through to upcoming reports from other advertising-driven media companies.

Gannett continues to struggle with declining newspaper publishing revenue but underlying trends at its stable of larger market local TV stations were solid. My friend Mike Morris of Davenport Research noted that excluding the Super Bowl and assuming 50% of political ads crowded out other ads, Gannett's TV stations had almost 4% growth. Under similar assumptions, based on guidance from Gannett management, at least low single digit growth looks set to continue in the second quarter. These results and forecasts suggest that upcoming reports from major market TV station owners, including CBS (CBS), News Corporation (NWS), and Disney (DIS), should be at least in line with expectations. One could also argue that demand must be healthy if political is crowding out other advertising. Local TV has been a bright spot the last few quarters after lagging the gains in national TV since the bottom of the cycle in 2009.

Omnicom reported mostly inline results. The key takeaway for media stocks is underlying organic US advertising growth of a little over 4%. This growth is not as strong as it was through most of 2011 but it is still a healthy rate. I think Omnicom is signaling that my thesis is correct: US advertising has entered a normal phase after completing the bounce off the cyclical bottom. This matters to media stocks because many investors are concerned that decelerating growth rates in advertising are signaling a downturn is at hand. If investors gain confidence that ad markets remain healthy, bullish sentiment toward media stocks is likely to improve. I believe this is likely to occur but guidance commentary in the upcoming earnings reports will be determinant of whether I am right.

This column was previously published by SNL Kagan on
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