Google Exceeds 4Q Forecasts, Though Earnings Drop

Google Inc.'s profit slipped for the first time in the fourth quarter, but the Internet search leader is still weathering the economic storm better than analysts anticipated.

The results released Thursday indicated the Mountain View, Calif.-based company was able to rein in its free-spending ways enough to offset a slowdown in the online ad market that generates most of Google's revenue. That contrasted with a missed forecast and 5,000 layoffs announced earlier in the day by rival Microsoft Corp.

Even so, there were signs the recession is starting to bear down on Google.

The downturn forced Google to write down $1.1 billion of the combined $1.5 billion that it has invested in two troubled companies, AOL and Clearwire Corp. And Google is allowing its 20,222 employees to swap their outstanding stock options for new ones that will carry a lower exercise price - which means the workers will have a better chance of making money from the options.

The move was driven by 47 percent drop in Google's stock price over the past year, leaving about 17,000 employees holding options that are "under water" and can't be cashed in now at a profit.

Although he hailed his company's strength in a decrepit economy, Google Chairman and CEO Eric Schmidt signaled the challenges are becoming more daunting by describing the fourth quarter as "the easy part" and calling the upcoming months as "uncharted territory."

"We don't know how long this period will last," Schmidt told analysts in a conference call. "We obviously hope it will be short. We're certainly prepared to get through this, no problem."

Google made $382 million, or $1.21 per share, in the three months ending in December. That was a 68 percent drop from the same period in 2007. Google's profit had climbed by at least 17 percent in its previous 17 quarters as a public company.

If not for employee stock compensation costs and the charges on its deteriorating investments, Google said it would have made $5.10 per share. That beat the average estimate of $4.95 per share among analysts polled by Thomson Reuters.

Revenue climbed 18 percent to $5.7 billion. That marked the first time Google's revenue growth had fallen below 30 percent from the previous year.

After subtracting commissions paid to its ad partners, Google's revenue stood at $4.22 billion - about $100 million above analyst estimates.

Google shares gained $6.68, or 2 percent, in extended trading after finishing the regular session at $306.50.

In a sign that skittish consumers are still coming to Google when they are in a mood to shop, the volume of clicks on Google's ads rose by 18 percent from the same time last year. That's important to Google because the clicks trigger payments by advertisers.

"Our business is quite healthy, especially given the economic climate," Schmidt said.

Even so, Google has become more frugal to better position itself during tighter times. Besides closing unpopular or unprofitable services, Google has been clamping down on its payroll. The company added just 99 workers in the fourth quarter, down from nearly 900 at the same time in 2007, and recently laid off 100 recruiters because it no longer needs them. What's more, Google spent just $368 million on capital projects in the fourth quarter, an 82 percent drop from the previous year.

"We are just managing responsibly, given the environment," Patrick Pichette, Google's chief financial officer, told analysts in the conference call.