Google's top executives drove through a simple message at the company's annual meeting with Wall Street analysts this week: the sky is the limit on the company's revenue growth potential in the long term.
Seeking to repair damage to share price
Company Chairman and Chief Executive Officer Eric Schmidt and a host of Google business leaders mounted a united front to leave no doubt that the company is far from reaching a plateau in its sales growth.
The apparently concerted effort seems to be in response to comments made two days ago by the company's Chief Financial Officer George Reyes at a conference, where he said that Google's growth rates were slowing with each passing quarter and that the search engine giant has to find new ways to generate revenue. Those comments sent Google's shares tumbling.
Later that day, Google issued a statement to clarify Reyes' comments, saying that "monetisation improvements will continue to be a key factor in driving future revenue growth. We still see significant opportunities to improve monetisation and intend to continue to focus our efforts in this area."
Google also stated that indeed its revenue growth rate has declined over time and that it expects it will continue to do so "as a result of the difficulty of maintaining growth rates on a percentage basis as our revenues increase to higher levels."
At the analyst meeting, Schmidt outlined a number of areas where Google has significant room to grow in the long term, including in most segments of the total advertising market beyond the online medium, such as print and broadcast advertising. Online advertising makes up less than 4 percent of the total US advertising spending, according to the IAB (Interactive Advertising Bureau).
In paid search online advertising, which makes up about 99 percent of Google's total revenue, the company sees big growth opportunities in ads tied to various search services, including local search, Schmidt said. "You think local will be a huge business? You betcha," he told analysts congregated at the company's headquarters.
Google also sees tremendous growth potential in online ad markets abroad, particularly Europe and Asia, and in monetising the services in which it isn't yet selling ads, he said. Through its recently extended and expanded partnership with AOL, Google is also planning to grow in display ads, he said, referring to this online ad format which Google has barely explored. Google also can increase revenue by improving the quality of the ads it runs, which will increase the number of times users click on them.
He explained that Google's first priority is to continually improve the quality of its search engine, in order to increase end-user traffic. That makes Google an attractive medium for advertisers, which in turn fuels the revenue engine, he said.
Addressing the issue of click fraud, a threat to Google's pay-per-click model, Schmidt said Google has teams policing the problem and that it isn't a "material" problem right now. He also dispelled the notion that prices for search keywords, on which advertisers bid, are hitting a ceiling, although that may be true in specific segments.
CFO Reyes, who moderated the meeting, made opening comments apparently intended to remedy the ones he made two days ago. He called Google "the largest, single source of the world's information" and said the company has a "powerful" business model and a "deep pipeline of products and monetisation opportunities." Reyes also said Google has an "extraordinary" record of producing growth and that it is making "disciplined investments" for its long-term health.
Later, during his formal presentation, Reyes said Google has been delivering strong quarterly and annual growth rates in revenue and operating income.
"As we look forward into the next year, we believe our business is exhibiting very strong fundamentals and excellent growth potential," Reyes said. "We'll invest aggressively in the business to generate superior returns."
Asked about Google's decision to launch a censored search engine service for China, co-founder and technology president Sergey Brin said the move is one that the company and he personally didn't make lightly.
"That's an issue dear to my heart, because I was born in the Soviet Union during the communist era," Brin said.
After much debate, Google's management decided that it would be more harmful to the company and to the Chinese people not to provide the service.
However, it's a situation the company monitors constantly. "We'll see how that evolves. Obviously, it doesn't mean we'll just be willing to do anything that's requested of us," Brin said.
Brin also defended Google's refusal to turn over search engine usage records to the US Department of Justice, a decision that prompted the government to take the company to court in January. The legal tussle is in progress.
Not only is the US government "over-reaching" with its subpoena, but Google also believes it shouldn't be in the business of doing the government's "homework," which would put Google on a slippery slope, Brin said.
In filing a motion to compel Google to comply in the US District Court for the Northern District of California, US Attorney General Alberto Gonzales said that the government needs those Google usage records to prepare its defense in a lawsuit brought against it by the ACLU (American Civil Liberties Union).
The ACLU lawsuit, filed in 1998, challenges the COPA (Child Online Protection Act), which aims to protect minors from the effects of exposure to sexually explicit material on the internet.