How Bad Was Google's Quarter?

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As investors wait for Google to announce first quarter earnings later this week, the question is how bad will it be? J.P. Morgan analyst Imran Khan put out a note this morning predicting that U.S. revenues will actually decline 2 percent from last year and will be down 13 percent from last quarter. (His prior estimate was for 5 percent growth). Overall, he expects net revenues to decline 4 percent instead of 2 percent and Khan also revised his pro forma EPS estimates down 5.5 percent from $5.04 to $4.76.

What’s got him spooked? Through February, comScore is showing declines in U.S. search activity (measured in query volume) and Khan’s own checks with search-engine marketers leads him to believe that commercial-oriented searches took a hit during the quarter. That would be significant since so far search has remained the healthiest segment of the online advertising industry. While search advertising has experienced a dramatic slowdown in growth, it has yet to see any actual declines. Will this be Google’s first down quarter in terms of revenues?

It is certainly acting that way—cutting temporary workers and even a few hundred full time staff, and killing projects left and right. Khan thinks all of these cuts will result in $450 million in savings this year alone:

● We believe Google has taken a very conservative stance to employee count, perks, and business investments. Cuts include reducing usage of ~6,000 contract workers and ~300 full-time employees (our est’s), cutting some free food cafes, the hours they run, and the people to whom the perk is extended, and shutting down or discontinuing further development of some businesses. We estimate that these cost cuts will reduce spend by ~$450M in F’09.

Finally, Khan believes that about 20 percent of Google advertisers will cut back their spending as a result of tighter credit markets and the general economic downturn. Meanwhile, the stock has been on a tear the past month, rising from $290 on March 9 to today’s closing price of $378. Will a bad quarter end the ride, or will Google somehow pull it off despite the challenges?

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