Ad Recession Takes Bite Out of Google Revenue

But First-Quarter Total of $5.51 Billion Was Up 6% Year Over Year

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NEW YORK ( -- The recession has hit Google, handing the company its first quarter-over-quarter decline in ad revenue, as marketers cut their search-advertising budgets after the holiday season. But while its first-quarter revenue of $5.51 billion was down 3% compared with the fourth quarter, it was up 6% year over year.

Eric Schmidt
Eric Schmidt
And the slowdown in ads didn't hurt the company's profitability: Google reported net income of $1.42 billion, or $4.49 a share, in the first quarter, up 8.9% from the same period a year ago.

"Google is absolutely feeling the impact," CEO Eric Schmidt said today. "Users are still searching, but they're buying less. That means ads are converting less. There's more window and comparison shopping, and they're purchasing lower-priced goods. In other words, consumers are doing the right thing." He said the key for Google is to continue to preach the return it delivers, and manage its own expenses and bottom line. The search giant continued to grow its cash flow and ended the quarter with $17.8 billion cash in the bank.

The revenue Google generates from its own sites was up 9% year over year to $3.7 billion, but the revenue it gets from selling ads on third-party sites fell 3% to $1.64 billion. Its revenue mix shifted very slightly toward international sources: 52% of its revenue came from outside the U.S., up from 51% a year ago.

Upper-management move
The company also announced today that its global sales and business-development chief, Omid Kordestani, a 10-year veteran of the company credited with being its "business founder," is leaving his role to become a "senior adviser" in the office of the CEO and founders, working on new business opportunities. Former T-Mobile Chief Marketing Officer Nikesh Arora, who has been with Google since 2005 and most recently oversaw its business across 28 offices in the European, Middle Eastern and African markets, will take over for Mr. Kordestani as president-global sales operations and business development.

Omid Kordestani
Omid Kordestani
It's the second major upper-management change at Google in two months and the second time a major European Google exec has taken on a larger role. Mr. Kordestani was the executive to whom former head of Americans operations Tim Armstrong reported, until Mr. Armstrong left last month to become CEO of Time Warner's AOL. Incidentally, Mr. Armstrong's replacement, Dennis Woodside, who most recently headed operations in the U.K., Ireland and Benelux, reported to Mr. Arora.

On its earnings call with analysts this afternoon, Google pointed to the difference in spending between large and small advertisers. It faces a challenge in getting big brand advertisers to buy into the idea that search is not a marketing expense but rather a sales-channel expense.

"In the case of large advertisers, you have the CMO making decisions and looking at spending as a marketing expense. In this kind of downturn and the severity of the crisis, a lot of those budgets were put on hold or delayed," Mr. Kordestani said. However, he said, "in the small-and-medium-business segment, customers continued spending. And we attribute that to the fact they see this form of search as a sales channel and way to generate leads, and as long as they still see those leads, they'll continue to spend."

One analyst asked whether Google has tried to reach out to senior execs at the CEO or chief-financial-officer level to get companies to think of search less as a marketing expense and more as a customer-acquisition expense. Mr. Kordestani briefly said Google tries to "service all the senior execs."

'Innovation is alive and well'
Mr. Schmidt also addressed the microblogging network Twitter, saying that the site proves "innovation is alive and well in Silicon Valley." As for monetizing the service, he said he doesn't personally know the strategy, but "it could be a channel for product information from which you can hang advertising, whether it's a text ad or video ad. ... That's something we'd be very happy to pursue with them and all the other players in that space."

He also said YouTube is making "very good progress" in content deals with production studios, and while advertising was the No. 1 priority for monetizing the video site, the company is also exploring micropayments and subscription revenue. He dodged a question about the percentage of ads the site is working with; Ad Age recently reported that YouTube is running ads against 9% of its streams.

"You Tube and its adoption will benefit from very targeted display models, which is what we're in the process of building," he said.

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Michael Learmonth contributed to this report.

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