Big tech appears to have sidestepped the worst of expected falls in digital advertising revenue, and a large part of that is due to advertisers shifting from brand advertising to quicker, cheaper ads that provide immediate sale conversions.
Prior to Facebook and Google releasing their first quarter results last week, stocks for the companies were dropping as analysts slashed expectations due to the global downturn in advertising caused by the coronavirus pandemic.
But after announcing their results, Facebook and Google share prices were up about 6% and 8% respectively.
Digital advertising isn’t immune to the shock caused by COVID-19, but the strong performers, Google, Facebook and even Snapchat, pointed to direct response ads, those that drive consumers to take immediate action, as a positive that helped them during the pandemic.
Over the same period of time, traditional media, which relies more on long-term brand building campaigns, responded by cutting jobs, pay and even suspending newspaper and magazine printing as a result of weak ad revenue.
Facebook, which reported revenue of US$17.4 billion in the first quarter, up 17% year-on-year, said it saw a strong start to the quarter, but experienced a slowdown from the second week of March in line with lockdown measures around the world.
Without revealing how much of its advertising business is direct response, Facebook CFO David Wehner says it has driven the business for years, and has been particularly important during the current crises.
“I would say, if anything, COVID has accentuated the importance of people who are bidding for online conversions,” he says.
“And so I think we've seen a falloff in some of the more sort of broad-based brand advertising right now, and really a focus on those things that are driving direct results today, which isn't really surprising, given the economic climate.”
Google shared a similar experience, calling quarter one “a tale of two quarters”.
The company reported US$24.5 billion in advertising revenue for Google Search and other, up 9% year-on-year.
However, in March revenue began to decline and ended the month at a mid-teens percentage decline in year-on-year revenues. YouTube advertising revenue was US$4 billion for the period, up 33% year-on-year.
Google and Alphabet CFO Ruth Porat outlined different performance trajectories for brand and direct response advertising during March.
“Direct response continued to have substantial year-on-year growth throughout the entire quarter,” Ruth said.
“Brand advertising growth accelerated in the first two months of the quarter, but began to experience a headwind in mid-March. As a result, by the end of March, total YouTube Ads revenue growth had decelerated to a year-on-year growth rate in the high single digits.”
Speaking later on the resilience of direct response ads, Alphabet and Google CEO Sundar Pichai said they’re seen as cost effective.
“The good thing about Search Ads and direct response on YouTube as well, but Search primarily, is that it's an extraordinarily effective system,” Pichai said.
“It's a transparent system. You have a very clear sense of ROI. It's very measurable, highly cost effective. And so we have always seen -- and we saw this in 2008 as well -- people respond in the short term, but the recovery is also fast when it comes back.”
But while Google and Facebook have seen positives from direct response advertising, Twitter said there was “tremendous” opportunity for it in direct response that it wasn’t capturing.
The social media company posted a revenue of US$808 million in quarter one, up 3% year-on-year.
Speaking to analysts, chief financial officer Ned Segal said it’s working on improving its direct response ad formats that would expose it to advertising demand that may be more “resilient” through an economic downturn.
“When we look at the verticals that advertise on Twitter most, remember, a lot of these are consumer packaged goods, tech and teleco, media, financial services, companies who have large consumer businesses and where being out in front of their customers at the times that are important to them is really impactful,” Segal said.
“So we tend to have less advertising from things like travel or considered purchases than some others may. And as we work hard to improve our direct response offerings, we think that will help us even more with this group of advertisers. As in a more constrained economic environment, they really want to be able to measure everything they're doing, assign attribution to it. These better ad formats that are further down the funnel, we think, will better position us to help them with that.”
What will happen from here?
A big takeaway from Facebook and Google that sent their stocks up was that both gave signals the worst could be behind them, while Twitter suggested the road for it was still rocky.
Facebook’s Wehner says the environment remains too uncertain to provide an outlook, but did point to stability in the current quarter.
“After an initial steep decrease in ad revenue in March, we have seen signs of stability reflected in the first three weeks of April,” he said.
“Ad revenue has been approximately flat compared to the same period a year ago, down from the 17% year-over-year growth in the first quarter of 2020. The April trends reflect weakness across all of our user geographies as most of our major countries have had some sort of shelter-in-place guidelines in effect.
“We are understandably cautious given that most economists are forecasting a global GDP contraction in Q2, which, if history were a guide, would suggest the potential for an even more severe advertising industry contraction.”
Additionally, CEO Mark Zuckerberg warned against reopening the economy too soon, an issue that’s been particularly debated in the US.
“The impact on our business has been significant, and I remain very concerned that this health emergency and therefore the economic fallout will last longer than people are currently anticipating,” Zuckerberg says.
Meanwhile, Google, which says decline in APAC was more “muted” than the rest of the world, says the decline in revenue was abrupt in March.
“And although we're seeing some early signs at this point that users are returning to more commercial behavior, it's not clear how durable or monetisable that will be,” Porat said.
“So based on our estimates from the end of March through last week, for Search, we haven't seen further deterioration in the percentage of year-on-year revenue declines. For YouTube, direct response has remained strong. However, we have seen a continued decline in Brand advertising.”
Twitter saw advertising revenue from March 11 to March 31 fall by about 27% year-on-year. Segal, who noted that Asia wasn’t as hard hit as the US, worried the market when he suggested it was an indication of its start to the second quarter.
“First, when we think about what it's been like to navigate through this unprecedented time, I think the best time frame to point you to would be that March 11 to March 31 time frame,” he told analysts.
“That gives you a good sense for what it's been like for us.
“And I'd just also point out, in such a dynamic environment, for you or us to try to discern trends based on the tremendous change in advertiser behavior as the economy continues to evolve may not be prudent. So I'd just point you back to that March 11 to March 31 time frame.”
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