Big tech and ad firms were relatively unscathed by declining ad revenue in Q1, but Q2 outlook is darker

Key Points
  • A slew of companies that rely heavily on ad revenue reported their first-quarter earnings this week, showing that a steep drop-off of advertising in March didn't hurt their quarters quite as much as analysts expected.
  • But though there appeared to be some green shoots from the tech giants in the realm of advertising, companies warned impacts will be felt in the second quarter and, in some areas, beyond. 
  • Ad-supported tech giants including Facebook, Google parent Alphabet and Twitter each reported earnings this week, as well as public companies in the advertising space, like ad holding giants Omnicom and WPP as well as ad tech company Criteo. 
The signs at the Times Square that thanks to healthcare workers are seen in New York City, United States on March 20, 2020.
Tayfun Coskun | Anadolu Agency | Getty Images

A slew of Big Tech companies that rely heavily on ad revenue reported earnings this week, showing the steep drop in advertising during March didn't sting as much as analysts expected. Shares of some of those companies, including Google parent Alphabet and Facebook, rose on the reports of ad revenue stabilization in April.

But those firms warned that the impacts of Covid-19 on the advertising market will linger into the second quarter and beyond. 

Here's what Alphabet, Twitter, Facebook, Amazon and others had to say in their reports this week, and a look at how some of the biggest ad companies are thinking about the second quarter.

Impact on Big Tech

Tech giants Google and Facebook each pointed to stabilizing April advertising figures, but said any larger downturn will hurt the advertising industry.  

Facebook's chief financial officer, Dave Wehner, said on the company's earnings call Wednesday that it saw an initial steep decrease in ad revenue in March, but signs of improvement in the first three weeks of April as ad revenue was approximately flat compared with the same period a year ago. But he said the company is cautious of a broader contraction in advertising. 

"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," Wehner said.

Ruth Porat, chief financial officer at Google parent Alphabet, echoed those sentiments on its earnings call Tuesday. She said to gauge the ongoing financial impact to its business from Covid-19, a key signal to monitor is macroeconomic performance, which has typically tracked with advertising spend. 

"As of today, we anticipate that the second quarter will be a difficult one for our advertising business," she said. "As we move beyond the crisis and the global economy normalizes, this should be reflected in our advertising revenues, but it would be premature to comment on timing given all the variables here."

And while Twitter's first-quarter 2020 earnings Thursday beat estimates despite an expected hit to its ad business due to the coronavirus pandemic, the stock fell more than 6% during the earnings call. On the call, executives offered few signs of recovery or stability in the current quarter in its advertising business. CFO Ned Segal pointed to weakened advertising spending at the end of March as a signal of what Twitter has been experiencing this month.

Over at Amazon, the company's "other" revenues were still growing strongly, but the company said it began to see an impact in March, with some downward pressure on price. The company said the impacts were "not as noticeable as what some others are seeing," in part because of the "continued strong traffic we have to the site."

Barclays analysts said in a research note Thursday that they expect to see Amazon's other segment revenue growth decelerate in the second quarter — rather significantly, from 44% year over year in Q1 to 20% year over year in Q2 — because of industry-wide advertising headwinds. 

At Comcast, ad revenue fell 2.2% during the quarter, "reflecting audience ratings declines and reduced advertiser spending resulting from the postponement of sports events due to COVID-19, partially offset by higher pricing," the company said. Comcast said it expects advertising to be down "significantly" in the second quarter. 

Impact on advertising companies

For companies that rely on advertising revenue, a common theme emerged in the first quarter: Strong growth in January and February, then a sudden and steep contraction in March, as stay-at-home measures kept people home — and forced many businesses to close — around the globe.

The pullback may be felt in waves. Omnicom Group, whose clients include major companies such as PepsiCo and AT&T, said it expects the pandemic to substantially affect all of its clients, even if they aren't feeling the effects right away.

Omnicom said some sectors felt impacts of the pandemic more imminently and more significantly than others, responding by pulling back ad spend or postponing campaigns. Those sectors include travel, lodging, entertainment, nonessential retail and automotive. 

Other sectors have proven more resilient in the near term, like health care and pharmaceuticals, technology, telecommunications, financial services and consumer products. But Omnicom expects demand for advertising to constrict across the board as marketers reduce costs because of economic uncertainty. 

Omnicom peer WPP, the world's largest advertising holding company, saw revenue in the first quarter fall 4.9% but said it expects the impact of Covid-19 on its business to increase in the short term. (Its CEO, Mark Read, said three times on its Wednesday conference call that the second quarter was going to be "tough"). 

Criteo, a French ad tech company that has traditionally focused on retargeting and has been working to diversify more recently, painted a much more specific and dire picture in the near term. The company said it started feeling the impact of Covid-19 in mid-February, and that its different verticals have been impacted differently. It said its business mix is traditionally about 70% retail, 10% travel, 10% classifieds and the remaining 10% are made up of areas like auto, finance and gaming. 

The company believes its business in the second quarter will decline by 32%-35% year over year, and that it will make a progressive recovery through the second half of the year — assuming there isn't another significant wave of the virus. 

Criteo's CEO, Megan Clarken, said spend in the travel vertical decreased by around 95% compared to pre-Covid levels, spend in classifieds decreased by 40% or more, and that retail's spend reduction in its core solutions was about 10%. 

"Looking forward, in short, we see a slow recovery out of the crisis with no full return to pre-Covid levels by the end of the year," she said. 

The company anticipates retail will gradually recover "in the near of the second half of 2020," helped by government support measures. She said retail will "remain weak" in the U.S. into the fourth quarter. For travel, it has modeled a "much slower recovery," and expects a material impact still by the end of the year. 

Ad-driven internet companies have 'big opportunity' for growth: Jefferies
Ad-driven internet companies have 'big opportunity' for growth: Jefferies

Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC.

Correction: WPP is the world's largest advertising holding company. An earlier version misstated its status.