Google reports strong Q4; announces employee stock option exchange

updated: Search giant Google today reported a strong fourth quarter with net income of $382 million, or $5.10 per share, on net revenue of $4.2 billion, an 18 percent increase, beating Wall Street's estimates of $4.96 per share on $4.12 billion in revenue. Wall Street has been watching Google - specifically search advertising - to see if it can ride the economic storm while other forms of advertising feel the pinch. (Statement)

The company also announced plans to offer employees a voluntary, one-for-one stock option exchange program intended to "create more incentives for employees to remain at Google and contribute to achieving its business objectives." It is scheduled to begin on January 29, 2009 and end on March 3, 2009.

In a call with analysts, CEO Eric Schmidt said the company maintained "tight control over costs" but also noted that advertisers in a tight economy are looking for targeted, measurable advertisements, something that can be offered in the online environment. In a statement,  Schmidt said:

Google performed well in the fourth quarter, despite an increasingly difficult economic environment. Search query growth was strong, revenues were up in most verticals, and we successfully contained costs. It's unclear how long the global downturn will last, but our focus remains on the long term, and we'll continue to invest in Google's core search and ads business as well as in strategic growth areas such as display, mobile, and enterprise.

The company noted the launch of more than 350 quality improvements to search, including an iPhone app that allows users to speak their search query, as well as tap. Also, Schmidt hinted at something to look forward to in 2009: search results based on the meaning of the phrase typed, not just the words within the query.

In regard to the stock exchange program, Schmidt noted that about 85 percent of its employees are underwater with their options. Schmidt said options are part of the compensation package and should maintain value over the long term. The voluntary program allows employees to swap their underwater options for new ones but have to give up 12 months of vesting. (Last summer, VMWare re-priced options for U.S. employees who were underwater with them.)  The details, via the company's release:

We expect that new options will have an exercise price equal to the closing price per share of our common stock on March 2, 2009 and that stock options with exercise prices above this closing price will be eligible for exchange, but this may change. Generally, all employees with options are eligible to participate in the program. The number of Google shares subject to outstanding options will not change as a result of the exchange offer. We have designed the program so that new options issued as part of this exchange offer will be subject to a new vesting schedule which adds 12 months to the original applicable vesting dates. In addition, new options will vest no sooner than 6 months after the close of the offer period. The expiration dates of the new options will remain the same as the expiration dates of the options being exchanged. We expect to take a modification charge estimated to be $460 million over the vesting periods of the new options. These vesting periods range from six months to approximately five years. Assuming the offer proceeds according to our planned timeline, this modification charge will be recorded as additional stock based compensation beginning in the first quarter of 2009.

Eric Schmidt, Sergey Brin, and Larry Page do not hold options.

Also worth highlighting:

• In terms of trimming costs, the company said it will continue to monitor products, services and partnerships and make adjustments, as necessary. The most recent example was the print-ad partnership with newspapers that Google pulled out of earlier this week.
• More than 800 applications have been developed for Android, the company's mobile phone operating system, and that there are more phones in the works for 2009.
• Google has reached a settlement with book publishers over a lawsuit surrounding its BookSearch program and is looking forward to an approval of the settlement.

Other highlights from the quarter include:

• As of December 31, the company had $15.85 billion in cash and cash equivalents.
• The company's workforce grew by 99 full-time employees in the fourth quarter, taking its worldwide headcount from 20,123 to 20, 222, an increase of 0.4 percent. By comparison, in the year ago quarter, the headcount rose by about 5 percent. Last quarter, it increased by 2 percent.
• Google-owned sites generated 67 percent of total revenue, or $3.81 billion, a 22 percent increase over the year-ago quarter.
• AdSense partner sites generated 30 percent of the total revenue, or $1.69 billion, a 4 percent increase over the year-ago quarter.
• Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of AdSense partners, rose 18% from last year's quarter.

Shares of Google were up slightly in regular trading, closing at $306.50, and had slight gains in after-hours trading.