Google Sees First Revenue Drop

Google and the economy

In every recession there are companies that seem almost immune. Almost.

Google (NASDAQ: GOOG) today reported the first quarterly drop in revenue in the company’s 10-year history, posting $5.51 billion in total revenues, off 3 percent from the mark of $5.7 billion the search giant turned in the previous quarter.

Amid a frosty ad market, Google’s earnings topped analysts’ already-lowered expectations, and CEO Eric Schmidt maintained that the company is well-positioned with its core search-advertising business.

“Google had a good quarter given the depth of the recession — while revenues were down quarter over quarter, they grew 6 percent year over year, thanks to continued strong query growth,” Schmidt said in a statement. “These results underline both the resilience of our business model and the ongoing potential of the Web as users and advertisers shift online.”

” We’re still basically in uncharted territory,” he said later on a conference call with analysts. “No company is recession proof. Google is absolutely feeling the impact.”

While growth has slowed considerably, Google’s balance sheet is still comparatively healthy. The company posted a quarterly profit of $1.42 billion, or $4.49 per share, a 9 percent increase from the same period the previous year.

Google posted non-GAAP earnings of $5.16 per share, ahead of the $4.93 analysts were looking for according to polling by Thomson Reuters.

The company attributed 97 percent of its revenues to advertising.

Despite the slowing growth, analysts continue to remain optimistic about Google. Earlier this week, online metrics firm comScore reported that Google enjoyed a 41 percent increase in search queries in the first quarter, the biggest spike since 2007. On the back of that report, Barclays analyst Doug Anmuth reiterated his opinion that Google was better positioned than its competitors in the Internet sector.

Google reported today that paid clicks on its search ads were up 17 percent from the first quarter in 2008.

In part, that favorable view comes from Google’s efforts to control costs in the face of a contracting ad market. The company has axed several trial projects that never made money, and last month it laid off about 200 employees.

“We’re still hiring, but only in the critical areas,” CFO Patrick Pichette said during today’s earnings call.

While its revenues are still dominated by search ads for the PC, Google is looking with hungry eyes toward other revenue lines, particularly mobile.

Last month, Schmidt said he expects mobile to surpass the PC market on Google’s balance sheet within the next several years, “not decades.”

At that talk, however, Schmidt also sought to dampen expectations for Google’s finances in the immediate future. “For the next few quarters, things are going to be very, very tough,” he said, adding that 2010 was the earliest to reasonably expect the economy to pick up again.

On the mobile front, Google has been pressing ahead with the open source Android operating system it oversees, offering a preview of the next version of the project earlier this week. Taking a page from Apple’s (NASDAQ: APPL) playbook, Google began accepting paid applications for Android in February.

Schmidt also confirmed the widespread speculation that Android will soon begin appearing in netbooks and other devices aside from smartphones.

“Overall, it looks like Android is going to have a very strong year,” he said. “We are already aware of many uses of Android.”

“There are announcements happening between now and the end of the year that are quite significant,” he added, but did not elaborate.

YouTube, Twitter and the news business

Analysts do see one glaring blight on Google’s balance sheet.

A recent report by Credit Suisse estimated that YouTube will sock Google with a net loss of $470 million this year as the video-sharing site continues to resist serious monetization through advertising. Google does not break out finances for the unit, but Schmidt and other executives have repeatedly said that turning a profit from YouTube has been a tough nut to crack.

Schmidt said the company remains focused on an advertising model for making YouTube profitable, though he said that micropayments for premium content and other monetization variants would be coming “very, very soon.”

He also noted the progress YouTube has made in partnering with entertainment companies to bring premium content to the site, pointing to the recent partnership with Universal Music to create an online music service, a deal Schmidt said he is “beyond excited about.”

“It redefines the business model between content owners and companies like Google,” he said. “We are making very good progress now with small, medium and large-scale studios.”

Google has also been in the rumor mill of late, as prominent tech blogs have been sparring over the nature of its clandestine talks with microblogging service Twitter. The latest rumors have Google and Microsoft both expressing interest in the startup’s real-time search technology. For Google, that could entail an all-out acquisition, or, more likely, some form of technology-licensing partnership.

Schmidt said the company remains open to working with Twitter as it develops its business model, which Schmidt envisions as some form of tailored advertising system. Twitter has recently said it is toying with different revenue models it hopes to implement later this year.

Looking ahead, the search giant could be facing a copyright showdown with the news industry, if the recent saber-rattling of the Associated Press is to be believed. The AP recently announced its intention to pursue legal action against Web portals and aggregators that post content from the news cooperative and its member newspapers without paying licensing fees.

Google has a hosting agreement with the AP that Schmidt has said he hopes to continue, but there has been widespread speculation that AP will attempt to renegotiate as the newspaper industry struggles to squeeze more money out of the Web.

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