ComScore: The Google Fallout

Google’s (GOOG) first quarter earnings call didn’t have much in the way of theatrics, but a serious brushback pitch was delivered to Comscore (SCOR). What should we make of Google CEO Eric Schmidt essentially throwing Comscore under the bus?

Following Google’s strong first quarter report (Techmeme) which looked impressive mostly because expectations were low because of paid click worries, Schmidt said the following on the earnings conference call:

“The business model continues to work very well and we’ve had good, disciplined management of our operating expenses, so thank you very much for the management team. It’s also interesting to note that paid clicks growth is much higher than has been speculated by third parties.”

On IM, I pinged Charles Cooper, who I bicker with all day long, and noted that Schmidt basically said “go long Google, short Comscore.” Coop ran off and did a post on Schmidt’s dirty deed since it was very clear that Google was talking about Comscore’s paid click data.

So what does this really mean? In the grand scheme of things, Schmidt delivered a brushback pitch to Comscore and could have opened the door for any company to publicly question the Internet measuring service’s numbers. Let’s be clear: It’s one thing if a peon like me questions Comscore’s data and model. It’s quite another when Schmidt raises the issue. Schmidt couldn’t have been pleased that one Comscore could cause so much market cap angst.

Should you trust Comscore’s data? Overall, Comscore data is fine in a portfolio of metrics to use, but it’s not perfect. Meanwhile, I’d be reluctant to read too much into Schmidt’s comments. Why? There’s another thread to ponder here: Google and Comscore’s data may not be that far off. CFO George Reyes said:

Aggregate paid clicks grew approximately 20 percent over Q1 2007 and approximately 4 percent over Q4. Paid click growth on Google.com in the U.S. remains healthy and other markets are showing strong growth as well.

Google’s 4 percent figure is a global data point. Comscore had Google’s U.S. paid clicks up 1.8 percent in the first quarter from the fourth quarter. It’s not unrealistic to assume that international paid clicks brought Google’s overall average growth to 4 percent. Google management talked about how its search tweaks helped international search results.

Here’s BMO Capital Markets analyst Leland Westerfield’s take:

In the U.S., for instance, the Comscore data indicated US paid-clicks grew merely 1.8%, and while Google did not specify U.S. paid-click growth, management did indicate domestic paid-click growth was “healthy” and, we surmise, much stronger than Comscore data implied. From this, we can infer three things:

1. International paid-clicks increased 20%-25%

2. Cost-per-click increased in the range of 8%-10% in the US and 20%-25% internationally.

3. The impact of “advertising quality initiatives” had a materially positive impact on global cost-per-clicks.

However, if Google’s U.S. paid click growth sequentially was really huge, wouldn’t the company point it out?

What remains to be seen is whether these Schmidt comments pose a long-term issue for Comscore, but don’t be surprised if they do. When Schmidt speaks the Internet industry listens.

Comments

[Michael B. Krause]

This just points to how irrelevent factoring in only US click data to determine google valuation is.

The comscore data will be useful for macro trends. If click data is down 10% q/q from comscore, I'd trust that as a general guide.

But more than half of revenues are from the international sources, so good points.

That said, $25 for next year gives you a forward PE of 21. Considering that lines up with growth #s of 20%, this is a fairly valued stock. If google gets yahoo's clicks, pop another $5 onto earnings and you have a $600 stock.

That said, I don't think there's much upside beyond that unless they find a way to monetize the developing world more aggressively.