Google: Despite Profit Drop, Fourth Quarter Was 'the Easy Part'

But the Next Period Is 'Uncharted Territory'

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NEW YORK ( -- Google's net income fell 68%, to $382.4 million, in the fourth quarter compared with the same period a year ago, but it posted a 17% increase in revenue. In what appeared to be an attempt to temper expectations for a more difficult first quarter, it called that "the easy part."

Google CEO Eric Schmidt
Google CEO Eric Schmidt
"In the fourth quarter, advertisers invested where the [return on investment] was the highest -- and that was online," said Google CEO Eric Schmidt. "Consumers are also using search for comparison shopping, and that helped us as well.

"In some ways fourth quarter was the easy part," he continued. "We had the holidays, people had excess inventory to sell. Now we're moving into uncharted territory. It's clear we are in a worldwide recession -- we don't know how long it will last."

Better equipped for recession
Google is arguably better equipped than most to handle a recession. It has lots of cash and an ad product that is both measurable and response-based. The company emphasized on its earnings call that it would continue to invest in search advertising, improving bidding and optimization tools, and the consumer side of search.

"Wouldn't it be nice if Google understood the meaning of your phrase and not just the words in your phrase?" Mr. Schmidt asked. Google will also focus on the display-ad market, specifically "bringing the science of search to the art of display" through its acquisition of agency DoubleClick. The company also said it was optimistic there would be breakthroughs at YouTube this year; the company is still trying to figure out how best to make money off of the massive video-sharing site.

Writes down AOL investment
Google also wrote down $726 million of its $1 billion investment in AOL. Silicon Alley Insider did the math and figured Google now values AOL at $5.48 billion, down from the implied value of $20 billion at the time of Google's 2005 investment.

Google's not the only one unsure of how the first quarter will end up; search-ad buyers are also unclear. There's some talk of whether the first quarter could be flat or even down.

"We're not expecting a robust first quarter," said Roger Barnette, CEO of SearchIgnite. "Clients are not pulling back spends dramatically but ... they're taking a deep breath and taking a look at what the consumer is doing."

Microsoft grows ad revenue
Incidentally, rival Microsoft also reported its fiscal-year second-quarter earnings today, and advertising was a relative bright spot, although still a tiny part of the company's revenue. Overall, Microsoft's online-services-business revenue was flat year over year at $866 million, but online advertising revenue was up 7%. (Overall revenue was up almost 2% year over year to $16.63 billion, but net income fell 11% to $4.17 billion, or 47 cents a share.)

Microsoft said search revenue grew double digits, while display revenue grew slower amid soft ad spending by marketers. It also said it was seeing "healthy growth" in its online traffic, with page views and search volumes both up sequentially and year over year.

Although the company is reducing its work force by 5,000 in the next 18 months, including 1,400 people today, it said it would add head count in the search area. It said, however, that it would cut marketing spending.

Still wants Yahoo acquisition
Microsoft left open the possibility that its quest to acquire Yahoo was still on the table, particularly now that a new chief at the helm of the portal could pave the way for more talks.

"There's advantages for consumers, advertisers, Microsoft and Yahoo through a search partnership, and we'd like to do one," said Microsoft CEO Steve Ballmer. "I know Carol Bartz ... and if it's appropriate, I'm sure we'll have the right discussion."

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Contributing: Michael Learmonth

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