Google: The Recession Takes Its Toll

The company's first quarter-on-quarter sales decline shows even the mighty search giant isn't immune to the pullback in ad spending

By Robert D. Hof

It's official now: Even Google can't escape the recession. With its first-quarter results on Apr. 16, the leader in Web search revealed its first quarter-on-quarter decline in sales, reflecting cutbacks in online ad spending. Thanks to cost cutting, Google (GOOG) handily beat profit expectations, but it offered no assurance that overall business conditions would turn around anytime soon.

Google's revenue, almost all of which comes from advertisements placed next to related search results, rose 6% from a year earlier but slipped 3% from the fourth quarter. Sales, after subtracting commissions to Web site partners, were $4.07 billion. That's about what analysts, who have been reducing their estimates in recent weeks, had expected.

Investors initially liked what they saw, boosting the stock almost 6% in extended trading after the figures were released. After all, Google's slowdown looks good compared with the larger advertising market, which is expected to fall at least 5% this year. But as it became apparent that Google's underlying business was feeling the effects of the recession, shares reversed course and gained only a fraction of 1%. "The quarter confirms that Google is suffering from the economic slowdown," says Sandeep Aggarwal, analyst at financial-services firm Collins Stewart.

No Rebound Yet

In comments during a conference call with analysts, Google executives, who don't provide formal earnings guidance, were muted in their outlook. They noted that the second and third quarters are usually "seasonally weak," implying they see little scope for a rebound, at least for now. "We're still basically in uncharted territory" in the overall economy, Google Chief Executive Eric Schmidt said, repeating a phrase he used in the previous quarter. "The economic environment…remains tough. Google absolutely feels the impact."

Google's reluctance to discuss the outlook for Web advertising echoes the unwillingness of chipmaker Intel (INTC) to issue a forecast when announcing its first-quarter results. But unlike Google, Intel was able to call a bottom in demand for the computers that use its semiconductors. Even mobile-phone maker Nokia (NOK) said it expects sales of wireless handsets to be flat or rise in the current quarter.

As uncertain as the market remains, Google's stock has been on a tear lately. Before rising 2.4% on Apr. 16 ahead of the earnings report, to 388.74 a share, the stock had risen 18% since the start of the year and more than 40% since hitting bottom last November. That run came during a period when the Nasdaq gained about 25%. In January, Google reported better-than-expected fourth-quarter results.

Slashing Expenditures

Because Google dominates just one business, search advertising, it's difficult to extrapolate its results to other Internet companies, such as Yahoo! (YHOO), which reports earnings on Apr. 21. But comments by Google's executives on the state of online advertising and the outlook for the economy provide the earliest indication of the difficulties that online advertising firms, and perhaps media overall, will face in coming months.