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Google growth slows dramatically in Q1

GOOGLE Inc. eked out a higher profit in the first quarter as the Internet search leader trimmed its work force and winnowed other expenses to overcome the slowest revenue growth since the company went public nearly five years ago.

The results released today illustrated how the recession is squeezing even prosperous companies like Google.

"No company is recession-proof," Google Chief Executive Eric Schmidt told analysts in a conference call. "Google is absolutely feeling the impact."

Schmidt and other Google executives repeatedly emphasized that the global economy remains in "uncharted territory."

The cautionary comments seemed to deflate investors. After initially surging more than 5 percent, Google shares backed off and had fallen 47 cents to US$388.27 in today's extended trading. The stock ended the regular session at US$388.74, up US$9.24.

Google is holding up far better than other advertising-driven businesses, largely because it relies on a marketing system that has proven to be less expensive and more effective than more traditional media.

The Mountain View-based company earned US$1.42 billion, or US$4.49 per share in the first quarter. That was a 9 percent increase from US$1.31 billion, or US$4.12 per share, at the same time last year.

If not for employee stock compensation costs, Google said it would have made US$5.16 per share. On that basis, Google exceeded the average estimate of US$4.93 per share among analysts surveyed by Thomson Reuters.

Google's first-quarter revenue totaled US$5.5 billion. That was up by just 6 percent from last year, marking the first time the company has posted less than double-digit revenue growth since its August 2004 initial public offering.

After subtracting commissions paid to its advertising partners, Google's revenue stood at US$4.07 billion - about US$10 million below analyst estimates.

In a telling sign of the recession's toll, Google's revenue fell from one quarter to the next for the first time. Its revenue in the prior quarter had been US$5.7 billion.

Google's profits probably wouldn't be rising in a shrinking economy if it hadn't brought in a new chief financial officer, Patrick Pichette, to help manage its expenses more carefully.

Since Pichette's arrival last summer, Google has been pinching pennies - a trend that came into even sharper focus in the first quarter.

Google shaved its operating expenses to US$1.52 billion during the first three months of the year, an 8 percent decline from the fourth quarter.

"They are cutting costs like there is no tomorrow," said Signal Hill Group analyst Todd Greenwald.

As part of the new frugality, Google reduced its work force for the first time. The company ended March with 20,164 employees, 58 fewer than in December. That cutback doesn't include Google's recently announced plans to lay off about 200 sales and marketing employees. In a Thursday interview, Pichette stressed Google is still hiring engineers and doesn't plan to lay off any more workers.

"Ninety-five percent of all our internal discussions are still about growth," Pichette said. "But it would be irresponsible not to watch our expenses in a tough economy like this."

Google curbed its spending on new computing centers and other major projects even more dramatically. Capital expenditures totaled US$263 million, a drop of 69 percent from the same time last year.

"My personal view on this is it's all about making us a better efficiency engine, that the changes and sort of tightness with which we're running now will put us in a stronger position as the recovery comes out," Schmidt said.

Even as it becomes more stingy, Google intends to still invest in areas that could help the company finally diversify beyond the text-based ads that generate most of its revenue.

Google's top sales and marketing executive for the past 10 years, Omid Kordestani, is stepping down from that job to steer the diversification efforts as a senior adviser to Schmidt and company co-founders Larry Page and Sergey Brin. Nikesh Arora, Google's president of international operations, is taking over Kordestani's former duties.

Google views its YouTube video site and Android software for mobile devices as two of its biggest moneymaking opportunities.

Although YouTube hasn't emerged as a major marketing vehicle since Google bought the site for US$1.76 billion in late 2006, it keeps adding more professional video that traditionally has attracted advertising. In a separate announcement Thursday, YouTube said it had struck a deal to sell video ads during full-length movies and TV shows that several major studios are allowing to be played on the Web site.

The Android software introduced last year now accounts for about 8 percent of all mobile Web browsing to rank second behind Apple Inc.'s iPhone, Google executives said today. Without providing specifics, Schmidt said Android's usage will expand later this year as part of "quite significant" announcements by Google involving several new pieces of hardware.

Google is counting on Android to help the company dominate advertising on mobile devices as thoroughly as it does now on office and home computers connected to the Internet.

Recent reports also have surfaced that Google might use some of its US$17.8 billion in cash to buy Twitter Inc., the startup behind an increasingly popular communications service that broadcasts short messages on the Web and mobile devices in bursts of 140 characters.

Although he didn't discuss the buyout speculation, Schmidt made it clear he would be interested in selling ads for the San Francisco-based startup.

Twitter "could become a channel for product information, market information, real-time information for which you can hang advertising products," Schmidt said.


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