Google earnings deliver; Sales growth slows; Economy still in 'uncharted territory'

Updated: Google reported first quarter net income of $1.42 billion, or $4.

Updated: Google reported first quarter net income of $1.42 billion, or $4.49 a share, on revenue of $4.07 billion, excluding traffic acquisition costs. Excluding various charges, Google reported earnings of $5.16 a share, well ahead of Wall Street estimates of $4.93 a share.

In a statement, Google chief Eric Schmidt said the company had a good quarter considering the recession. Indeed, revenue was up 6 percent from a year ago even though sales fell from the fourth quarter. Better expense management enabled Google to top estimates.

On a conference call with analysts, Schmidt noted:

"We're still basically in uncharted territory. The economic territory is tough and Google is feeling it."

He added that consumers are cutting back on spending and "advertisers are lowering their bids to manage their ROI." That said "we feel Google is well placed when the recovery begins," said Schmidt, who also noted that the search giant expects a typical seasonal slowdown in the second and third quarters. Google doesn't give guidance, but that's the closest you're going to get from management. 

Another data point: Google said searches on terms like foreclosure, bankruptcy and unemployment are surging.

Schmidt's comments about seasonality and the economy put the brakes on an afterhours surge. 

Google's messaging this quarter is focused on cost containment and investing for future growth.

That focus on costs is notable because Google's first quarter delivered an odd sight (less than stellar revenue growth). Google's growth was the weakest in its history as a public company year over year. The March quarter also marked the first sequential revenue decline for Google.  Google also shook up its sales team. Nikesh Arora, currently President of International Operations, will take over global sales for Omid Kordestani. Arora will have responsibility for all Google's revenue and customer operations. Kordestani will be an advisor to the "Office of the CEO and Founders."

Other notes from the conference call:

  • Google execs talked about overhauling advertising tools for AdWords and improving experience for advertisers. The goal: Improve click rates. One feature: Automatic keyword spellcheckers. 
  • The company will continue to invest in Android and display ad technologies. Google said it won't cut corners on long-term growth. 
  • There is a difference between small and large company customers in their approach to advertising spending. Saw small and medium sized businesses continued spending on ads to gain sales leads.
  • Google said the integration of DoubleClick has been "pretty smooth," and pretty on the way to being fully integrated.
  • "We continue to evaluate what we might do with the cash," said Schmidt when asked about what Google will do with its cash hoard. "We'll continue to be very conservative and that's not going to change."  
  • Regarding YouTube monetization, Google execs said announcements are coming soon and the video site is making good progress on deals with large studios. 
  • Android is going to have a "very strong year," said Schmidt. 

By the numbers:

  • Google generated a whopping $2.25 billion in cash in the quarter. 
  • Revenue, including traffic acquisition costs, was $5.51 billion, up 6 percent from a year ago and down 3 percent from the fourth quarter. TAC as a percentage of revenue was 27 percent - flat with the fourth quarter.
  • Network revenue (AdSense) was $1.64 billion, or 30 percent of sales, in the first quarter. That's down 3 percent from a year ago.
  • International revenue was $2.88 billion, or 52 percent of first quarter sales. That international revenue split matched Google's highest-ever tally.
  • Data center expenses, content costs and credit card processing fees were $666 million in the first quarter, down from $707 million in the fourth quarter.
  • Capital expenses---mostly IT investment---was $263 million.
  • Operating expenses as a percentage of revenue for the first quarter was 28 percent of revenue, down from 29 percent in the fourth quarter. Here's a summary of Google's expenses:

  • Paid clicks were up 17 percent in the first quarter, compared to a year ago, and up 3 percent from the fourth quarter.