Google Shows a 3% Sequential Dip In Revenues: First One Ever

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Google has just announced its Q1 2009 results, and for the first time ever, there has been a dip. Revenue fell 3% for the quarter versus the fourth quarter of 2008. But, for the year, revenues were still up.

And it’s actually not as bad as analysts had been expecting. JP Morgan, for example, had been expecting a 4% decline quarter to quarter. And, perhaps most importantly for Google, its paid click numbers were actually up. Aggregate paid clicks were up 3% quarter to quarter, and 17% year over year.

Google saw $1.4 billion in net income for the quarter, which was up 9%. Revenue was at $5.5 billion. Google now has $17.8 billion in cash and marketable securities on its balance sheet.

Also of note is Google’s Stock-Based Compensation numbers. In March, the company offered employees the option to trade in options that were underwater (worth less than the option price) for new, lower priced options. This was a necessary move to encourage people to stay with the company despite its plummeting stock price (at one point it was back in the $200s after being around $750-a-share a couple years ago). For this quarter, Google only counted $11 million of the total $360 million modification charge.

And Google acknowledged its layoffs this year. Whereas it had 20,222 employees as of December 31, 2008, it had 20,164 as of March 31, 2009. But the biggest employee news is the official announcement that its President of International Operations, Nikesh Arora, will replace Omid Kordenstani as Google’s global sales chief. Kordenstani will become a “senior advisor” to Google’s executives.

During the call, the most interesting comments came during the question and answer session when people asked about Android and Twitter. On Android, Google CEO Eric Schmidt noted that there would be several significant hardware announcements with partners coming up shortly. He declined to give anymore details, but basically it sound like a good number of new Android phones are on the way. Which is good, because I’m awfully sick of the G1.

Interestingly, Google noted that 8% of all mobile browsing is now down on Android phones. This is second only to the iPhone.

Someone also asked about using Android on netbooks, and Schmidt sounded excited that people were taking the initiative to use the operating system in that way. He noted that things like that are why Google decided to open source Android in the first place.

On the subject of Twitter, Schmidt gave the company a big wet kiss saying that it, “proves innovation is alive and well in Silicon Valley.” In terms of how it can make money, Schmidt said that he thought advertising on pages where brands or products are highlighted would be the way he’d do it. And he noted that Google would be happy to pursue that with them (as has been noted before, the two sides are talking).

Live Notes:

Google CEO Eric Schmidt:

  • “We’re still basically in uncharted territory” (with regards to the economy).
  • No company is recession proof, Google is feeling the impact.
  • Our advertising method is working
  • “We think Google is well placed for the recovery as it occurs or when it occurs and the shift continues to the Web, continues to give us a great advantage”
  • The shift online continues to give us an advantage
  • Advertisers lowering bids
  • Omid Kordenstani is stepping down. It’s impossible to explain the impact he’s had.
  • No one is better placed to advice us (Kordenstani will remain an advisor).

Google CFO Patrick Pinchette:

  • Google.com up due to traffic growth.
  • AdSense was down, impacted by clean-up of network partners.
  • Our advertisers slowed their spend
  • Lower-labor costs and we reset our company bonus plan
  • Traffic acquisition costs were roughly flat from Q4
  • “We’re still hiring” — but only in certain areas.
  • As previously announced, we’re eliminating 200 positions in sales and marketing, but those weren’t included in the Q1 numbers
  • Our revenues are seasonally weaker in Q2, so be prepared.

General notes:

  • On display, there’s a fragmented market.
  • We want to make display ads as relevant as search ads.
  • Google Latitude — talking about Google catching the purse thief.
  • Over 8% of mobile browsing is now on Android — second only to the iPhone
  • Searches on foreclosures up 42% year over year, “unemployment” searches have doubled
  • Health searches are seeing strong growth

Q&A Session:

  • Impact of bonus on costs, was it front-loaded? Strong end to 2008 put bonuses up high, now we reset it.
  • Seasonality question, abnormalities given the recession? Seasonality can become more visible in an environment with less growth (so now). Gaining marketshare in the past hid some of the seasonality, but that won’t be as much as a factor now. Traditionally Q2 and Q3 are slower.
  • Month over month is the trend that the economy is getting better? We don’t comment on monthly activity, but it’s a really tough economy. (Non answer.)
  • Has the credit crunch impacted small businesses? With large companies a lot was put on hold, in small to medium, customers continued spending though. They really see search advertising as a sales channel.
  • How is TAC? Lower TAC in general is because we see more growth in our smaller partners.
  • Display advertising, the move towards performance based — what’s missing? Too early to give insights in interest-based advertising (recently launched). But they think it’s going to be huge — much more targeted interest.
  • Costs? Googlers have been quite prudent on cost management. But we fully fund our strategic costs. “It’s all about making us a better efficiency engine,” Schmidt said. The company benefits from the discipline.
  • When will DoubleClick integration be fully done? We just hit 1 year anniversary of integration, it’s been pretty smooth, getting close to being fully integrated now. Not sure exactly how we define full integration, but coming along nicely.
  • On YouTube traction with the studios — what is the model the will work best? We are making very good progress with small, medium and large studios. Beyond excited with Universal Music deal — redefines business model. Our first priority is on ads, but micro-payments will come in time. We will be announcing new ad things in that area very, very soon.
  • Percentage of YouTube carrying ads now — has YouTube already reached its potential in terms of ads? Tremendous usage of the service, great advertiser interest. (Non answer.) People are very interested in advertising on the main YouTube homepage (Crank 2 is an example now). Real synergy between YouTube and the display products. Highly-targeted display ad models are being worked on for YouTube.
  • Any reason to think that pricing won’t come to regular levels? Advertisers are just being rational in this environment. As the competition increases, we’ll get back there.
  • Click-through rates on mobile versus regular search? Seeing more advertisers choosing to run their ads on mobile platforms. No specific data on click-throughs though.
  • How will you use the cash? The cash is “not burning a hole in our pocket,” Schmidt joked. We continue to look at what we might do with the cash, but our view is to remain very conservative.
  • CPC trends you’re seeing? People are still searching, but going for lower-priced things. And people are less interested in buying in this economy. As the economy comes back and as we get better at targeting, things are likely to improve.
  • Traction for Android and what about it on netbooks? Overall it looks like Android is going to have a very strong year. We’re often not aware of many uses of Android until right before they happen since it’s open-source. A lot of significant announcements from hardware partners are coming — but won’t pre-announce. On the netbooks, we think this is Android’s open source ideal working.
  • Positions eliminated? It was painful, but we need to be disciplined. We looked at performance and made calls.
  • How do you monetize something like Twitter? Twitter proves innovation is alive and well in Silicon Valley. Really has come on strong this past year. But how do you make money on that — and other companies like it? Maybe you have a channel for products where you put ads in there as well. We’d be happy to pursue that with them. People really want to communicate, is what Twitter proves.

Below, find the financial summary released:

Google reported revenues of $5.51 billion for the quarter ended March 31, 2009, an increase of 6% compared to the first quarter of 2008 and a decrease of 3% compared to the fourth quarter of 2008. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the first quarter of 2009, TAC totaled $1.44 billion, or 27% of advertising revenues.

Google reports operating income, net income, and earnings per share (EPS) on a GAAP and non-GAAP basis. The non-GAAP measures, as well as free cash flow, an alternative non-GAAP measure of liquidity, are described below and are reconciled to the corresponding GAAP measures in the accompanying financial tables.

* GAAP operating income for the first quarter of 2009 was $1.88 billion, or 34% of revenues. This compares to GAAP operating income of $1.86 billion, or 33% of revenues, in the fourth quarter of 2008. Non-GAAP operating income in the first quarter of 2009 was $2.16 billion, or 39% of revenues. This compares to non-GAAP operating income of $2.15 billion, or 38% of revenues, in the fourth quarter of 2008.
* GAAP net income for the first quarter of 2009 was $1.42 billion as compared to $382 million in the fourth quarter of 2008. Non-GAAP net income in the first quarter of 2009 was $1.64 billion, compared to $1.62 billion in the fourth quarter of 2008.
* GAAP EPS for the first quarter of 2009 was $4.49 on 317 million diluted shares outstanding, compared to $1.21 for the fourth quarter of 2008 on 317 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2009 was $5.16, compared to $5.10 in the fourth quarter of 2008.
* Non-GAAP operating income and non-GAAP operating margin exclude the expenses related to stock-based compensation (SBC). Non-GAAP net income and non-GAAP EPS exclude the expenses related to SBC, the non-cash impairment charges primarily related to our investments in AOL and Clearwire, and related tax benefits. In the first quarter of 2009, the charge related to SBC was $277 million as compared to $286 million in the fourth quarter of 2008. Also, in the fourth quarter of 2008, we recognized $1.09 billion in asset impairment charges related primarily to our investments in AOL and Clearwire. The tax benefit related to SBC was $64 million in the first quarter of 2009 and $65 million in the fourth quarter of 2008. The tax benefit related to the impairment charges was $82 million in the fourth quarter of 2008. Reconciliations of non-GAAP measures to GAAP operating income, operating margin, net income, and EPS are included at the end of this release.

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