Look Beyond Earnings vs. Expectations

Warning signs are found elsewhere, like the sequential growth rate.
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Let it never be said that the business media were moved by good reason. Old habits and misperceptions, yes. But basic sense? Stop hitting The Business Press Maven in the funny bone with that claw hammer.

Nowhere is this clearer than in the business media's near-exclusive fixation on reporting earnings vs. expectations and all but ignoring the sequential (year-over-year, month-over-month) growth in the numbers.

Take The Business Press Maven's

uncannily good call on

New York Times

(NYT) - Get Report

recently, done by considering the diminished sequential rate of growth in its Internet business. And with apologies to the false god of reporting earnings vs. expectations only (without, mind you, reporting on whether those expectations were last tweaked a year ago or five minutes before the release), we'll compare the bind of newspaper companies to the current state of

Google's

(GOOG) - Get Report

top-line sequential growth rate.

But first let's talk about me and why I'm so right.

Early Warning Signs

When the newspaper industry reported February advertising numbers, they -- meaning New York Times and others --

noted "one piece of good news for the industry -- ad spending on newspaper Web sites rose."

Au contraire

, shouted The Business Press Maven, whose only other French phrase is

foie gras

.

That was actually the worst news of all.

Though Web site revenue grew in real terms -- and though New York Times did not see fit to lower expectations, the only thing that would have tipped off the business media -- the year-over-year sequential growth rate for the newspaper's Internet sites (read: its last best hope) was in a steady two-year decline.

And if Web site revenue was to overtake (or even just compensate) for lost newspaper business in any real way, this was

way

too early in the growth cycle for the sequential growth rate to be in decline.

Sure enough, when New York Times

reported earnings yesterday, it lowered growth estimates on the all-important Internet side of its business. However, for those who watched revenue growth move from the 40s to 30s to February's teens, well, you didn't need a weathervane to see which way the wind was blowing.

And how did

The New York Times

, the newspaper that reported the "one good piece of news,"

report on the weakness of New York Times? It swallowed management's contention of across-the-board weakness in Internet advertising -- made more believable by

Yahoo!

(YHOO)

, which had just reported lower-than-expected earnings, but

less

believable by Google, which was just about to report better-than-expected earnings.

"Buffeted by an ongoing advertising recession..." the

Times'

article about the Times began.

An ongoing advertising recession? Uh, let The Business Press Maven make this clear. Although I get paid by newspapers so I want them to survive like nothing else, this is bone-crushingly dumb.

In the past few years, the newspaper companies have actually been propped up by one and only thing: an excellent advertising environment. It is the ultimate irony -- and ultimate danger -- that their troubles have come against this backdrop. There has been very recent weakness in real estate advertising, traditionally a newspaper cash cow, but can you imagine what things will look like in a true "ongoing advertising recession"? Even real estate, with the froth off the market but far from the sustained difficult market it will fall into, hasn't entered any sort of self-respecting recession.

The

Times

seems to say as much in the very next two sentences, noting that "the disappointing results underscored the increasingly tough economic times faced by the industry as advertisers continued to shift their focus away from print to the Internet. In particular, areas like real estate and classified, previously rich revenue generators for newspapers, continued to be weak."

Well, uh, a shift in advertising from newspapers to Web sites does not indicate an advertising recession. We are soon told that there is stiff competition for Internet advertising, which is true and, again, no indication of an advertising recession. Just near-limitless competition for companies that, in terms of classified advertising, had none for a century.

After the Times reported and held its conference call, blaming the troubled Internet advertising market, Google reported blowout numbers on the strength of advertising, surpassing expectations.

But, remember, any investor who just follows earnings vs. expectations is showing evidence of big doofus disease.

The Google Factor

Google's rate of revenue growth, as

The Wall Street Journal

was right to point out, "continued to slow." First-quarter revenue went up 63% from a year earlier. This compares to 67% in the fourth quarter and 79% in the first quarter of 2006.

The upshot?

Said the

Journal

of the decline in revenue growth: It is "a common occurrence when companies become larger and additional revenue gains come off a bigger base."

Fair enough.

The difference is that the Times' Internet growth was coming off a small base, and it desperately needed that growth to hold in order to help make up billions in newspaper dough.

But kudos to the

Journal

for considering the issue of sequential growth -- a calculation that frequently offers hints and can't be toyed with as easily as expectations. And Google investors would be wise to monitor this growth (or lack thereof). I do think it's cause to avoid the overblown bull case, as

laid out in

Business Week

.

Check out the headline and some of the subject headers, just to give you a taste of how overdone it is: "Google's Whopping Numbers: First-quarter profits sailed over most analysts' optimistic predictions, and not much is likely to slow the search giant down." That's followed by "Investors love this stock" and "hammering rivals."

Speaking of hammers, I'm feeling a telltale tapping on my funny bone again. In

Business Week

, there is no consideration -- even, like the

Journal

, to dismiss it -- of the sequential revenue growth rate issue. Now take that claw hammer back and enjoy your weekend.

At the time of publication, Fuchs had no positions in any of the stocks mentioned in this column.

A journalist with a background on Wall Street, Marek Fuchs has written the County Lines column for The New York Times for the past five years. He also contributes regular breaking news and feature stories to many of the paper's other sections, including Metro, National and Sports. Fuchs was the editor-in-chief of Fertilemind.net, a financial Web site twice named "Best of the Web" by Forbes Magazine. He was also a stockbroker with Shearson Lehman Brothers in Manhattan and a money manager. He is currently writing a chapter for a book coming out in early 2007 on a really embarrassing subject. He lives in a loud house with three children. Fuchs appreciates your feedback;

click here

to send him an email.