Google Profit Tops Forecasts But Recession Still Big Factor

Google's quarterly profit topped expectations, helped by cost controls, but Chief Executive Eric Schmidt said the economic environment remains tough with users still searching but buying less.

Paul Sakuma / AP

Shares of the No. 1 U.S. Internet search company initially rose 5 percent on the stronger-than-expected results, but then erased gains to trade flat after hours. The stock had risen about 30 percent in the past three months. Click here to get the latest after-hours quote.

"We're still basically in uncharted territory,'' Schmidt said on a conference call. "Google is absolutely feeling the impact. Users are still searching but they're buying less. Ultimately, what that really means is the ads are converting less.''

Compared to other Internet and media companies that depend on advertising revenue, Google has been extremely resilient to the economic downturn, though its revenue growth has slowed sharply from the heady 50 percent rates it used to enjoy.

Google reported first-quarter revenue of $5.51 billion, up 6 percent from the year-ago quarter but down 3 percent from the 2008 fourth quarter—its first ever sequential decline. The figure was in line with average Wall Street expectations.

"In one sense, revenue was certainly not robust, but considering the environment people are obviously taking that as somewhat of a comfort that it wasn't any worse,'' said Martin Pyykkonen, senior analyst at Wunderlich Securities. "Tougher times but better discipline within the company on the cost management side (meant) that they were still able to come in and beat the bottom line pretty nicely by a few percentage points.''

Net profit for the quarter ended March 31 was $1.42 billion, or $4.49 cents a share, up from $1.31 billion, or $4.12 a share, a year earlier.

Excluding special items, Google earned $5.16 a share, ahead of the average Wall Street forecast of $4.93 according to Reuters Estimates.

The figure also beat the "whisper number'' of $5 per share that some analysts and investors were expecting.

"Good quarter considering the environment,'' said Youssef Squali, managing director at Jefferies & Co. "Cost containment, including capex, was pretty impressive, which is what's needed to make the stock work short-term.''

Separately, Google's YouTube has signed deals with several Hollywood studios including Sony Corp to add their content to the video-sharing site.

Schmidt confirmed an announcement was coming, but did not give any details.

He also said Google did not have any intention of changing its "conservative view towards cash management,'' in a sign that a major acquisition may not be on the near horizon.

However, Schmidt said Google would be happy to pursue an advertising partnership with companies like Twitter, the microblogging site that is often cited as a possible acquisition target for the Internet search giant.

Google also said it expected to continue to make significant capital expenditures, but did not provide financial forecasts, following its custom.

Despite the broad-based slump in ad spending due to the weak economy, Google said paid clicks—by Web surfers on its text-based search ads—rose 17 percent in the first quarter from a year earlier.

"As advertisers are getting better control of their budget and a better understanding of their business under these macro conditions, they are taking money away from newspaper and television and going back online to advertise, and Google gets a disproportionate part of the market,'' said Sameet Sinha, senior analyst at JMP Securities.

Google also said Omid Kordestani, its senior vice president of global sales and business development, would step down to take a new role as senior advisor to the office of the CEO.

Kordestani will be replaced by Nikesh Arora, currently Google's president of international operations.

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