Downturn hits internet giants

In earnings announcements yesterday, Microsoft and ValueClick said their display advertising businesses have felt the pinch of the economic downturn in the United States. Google, in the meantime, pointed to category-specific weakness among real estate and financial advertisers.

"In the online advertising space...we are seeing a direct impact," said Microsoft Chief Financial Officer Chris Liddell. "We are not immune to that in the online space and we'll probably see that continuing certainly for the next quarter."

Microsoft established Q1 guidance that "assumes the continuation of the challenging online advertising market experienced in the fourth quarter," Liddell added.

ValueClick, meanwhile, missed its targets for the quarter ended June 30 and lowered its guidance for the rest of the year.

"Due to increasing macroeconomic uncertainty, we no longer anticipate the seasonal strength in ad spending we typically see in the second half of the year," said Tom Vadnais, ValueClick chief executive officer, in a prepared statement. A ValueClick executive wasn't immediately available to answer questions about the news.

ValueClick, in a statement, said the economy negatively impacted its online display ad network and comparison-shopping businesses in the United States during the second quarter. And the company said its lead generation business was flat during the same period.

Shrinking budgets did not appear to affect search as harshly. Google said its revenue growth remains positive everywhere except real estate and some financial sectors, such as auto financing, home financing, and real estate agencies. However CEO Eric Schmidt said the company has seen " no particular change in the macro environment."

In providing outlook for the year, ValueClick anticipates revenue from its lead gen business will decline by 19 percent compared to 2007, while its comparison shopping and search business will climb by 19 percent. It anticipates a "low single digital increase" for its display ad network business.

As a result, the Internet advertising company revised its 2008 revenue estimates downward. It said it expects $655 million to $675 million in revenue, instead $730 million to $745 million. If those new numbers hold up, ValueClick's annual revenue will climb by as much as 4.6 percent instead of 15 percent over 2007.

While revenue didn't climb as high as expected, ValueClick said it undertook "expense management initiatives," or in other words, curbed costs, so that its second-quarter profit will be higher than initially projected.

Commenting on ValueClick's earnings before Microsoft issued its quarterly report, Rob Norman, CEO of GroupM Interaction Worldwide, suggested it's still too early to draw major conclusions about the downturn's impact on Web ads.

"The range in the quarterly forecast may not be big enough to draw conclusions, but it appears that the full-year forecast shows much greater variations, and does indicate demand for ValueClick's product might be falling. However it's far from certain that this is a market-wide situation," he said.

ValueClick made the disclosures while announcing preliminary results for the second quarter ended June 30. Full details of second-quarter results will be released July 31.

Reported by Enid Burns, Zachary Rodgers, and Anna Maria Virzi.

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