Google's first-quarter finances: A fine line

Google has withstood the current economic troubles better than other advertising-dependent companies, but on Thursday, investors will get to see how well the company's belt-tightening is offsetting the recession's deepening effects.

The search giant, which makes the vast majority of its revenue when people click on ads next to search results, reports first-quarter financial results Thursday after the market closes. So far, though, financial analysts are mixed on whether Google's glass is half full or half empty.

On average, analysts surveyed by Thomson Reuters expect revenue excluding commissions to increase 11 percent to $4.085 billion and earnings to increase 2 percent to $4.93 per share compared with a year ago. Because Google reported $4.22 billion in fourth-quarter revenue excluding commissions, this could be the first revenue drop from one quarter to the next.

But analysts differ in their assessments.

Broadpoint AmTech analyst Rob Sanderson is on the half-empty side. He downgraded Google's stock from "buy" to "neutral," with this to say: "We believe consensus estimates are too high and need to come down for the first quarter and second quarter...We see the stock as more risky in the near-term and believe there may be a better entry point."

But Oppenheimer & Co.'s Jason Helfstein and Anil Gupta differ, expecting Google to meet or beat analyst expectations based on favorable developments with search ad payments. Despite lowering overall 2009 financial projections because of the recession and currency conversion rate issues, Google's "valuation remains compelling" and the analysts raised their stock price target from $390 to $410.

Ripple effects
Though Google's atypical business means it's hard to apply its fortunes to the overall market, its results have ripple effects.

For example, in the long run, the degree of Google's profitability could have repercussions for the company's high innovation rate. Google has shown the patience to invest in services that at least in the short run are money sinkholes. YouTube is the most prominent example, but newer arrivals include a revamped Google Voice, the Android mobile phone operating system, App Engine cloud-computing infrastructure, and Chrome browser.

A more restrained Google has cut several projects that weren't performing up to snuff, not just online services such as Dodgeball but also potential revenue-generation engines such as print and radio ads. And it's cut hundreds of employees through the process--nearly 200 in sales and marketing, 100 recruiters, 40 in a radio ad project, and an undisclosed number of contractors.

So far, the cuts haven't come close to the bone, but Google is being more careful choosing which projects to explore. Google now has "more focused resource allocations going into 2009...The review process is now a part of how we do business," said Jonathan Rosenberg, senior vice president of product management, as Google reported results from the fourth quarter of 2008.

For regular folks on the Web, that could mean fewer Google services or slower improvements to existing services. For competitors such as Facebook, Yahoo, or Microsoft, that could mean a little more breathing room, though of course no competitor is going to be complacent about the Google juggernaut.

Search ad questions
Google's reticence about financial performance and projections keeps people guessing about exactly how it's faring, and the present economic uncertainty compounds the situation. However, there are some data points worth noting.

First is, of course, how much people are searching. Each new search is an opportunity for Google--or search rivals Yahoo and Microsoft--to show an advertisement.

Next is ad coverage. Search engines must carefully balance showing ads more frequently, which can lead to more clicks on those ads and therefore more revenue, against showing them only when they're relevant to the searcher's query, which increases the likelihood that people will find the ads useful. Irrelevant or spammy ads instill the dreaded "ad blindness," in which people grow to ignore ads altogether.

Nielsen said searches grew 16.7 percent annually to 9.5 billion searches in March 2009, with Google outpacing the market with 27.6 percent growth to 6.1 billion searches. But upon seeing the more closely watched numbers from ComScore, JP Morgan analyst Imran Khan lowered his projections of Google's revenue and profit, and lowered his price target as well from $430 to $409.

"We think U.S. search performance will be weaker than previously expected," Khan said in a research note.

Cost-per-click declines
Bad news for search ad fortunes in general were results from Efficient Frontier, a search engine marketing company, which found that companies spent less per search ad in the first quarter of 2009. However, that effect was offset by greater search engine traffic and higher ad coverage, so it's not clear what the overall effect will be to Google and to search companies in general. The uncertainty is made worse by the fact that many statistics are only for the United States, but search and search advertising is a global business.

Finally, there's uncertainty about just how much effect Google's cost cuts are having. Khan estimates Google's expenses will be cut by about $450 million throughout all 2009.

Overall, though, there's no question that Google dominates a large and growing business. The troubles could be big or small, short or long, but Google's online cash engine remains stronger than those at Microsoft or Yahoo.