January 22, 2009, 5:28 PM — Google's profit took a dive in the fourth quarter, which ended Dec. 31, while revenue grew almost 20 percent, the company announced Thursday.
One-time investment write-downs were the primary cause of the earnings drop. CEO Eric Schmidt and other executives said during a conference call to discuss the results that the company's performance during the quarter had been strong and that they were satisfied, considering the current global economic problems.
"We had strong search query growth year-on-year, revenues were up in most verticals, and we had tight control of our costs, something which eluded us perhaps in the past, but we got the formula down now," Schmidt said.
Google reported revenue of US$5.70 billion, up 18 percent compared with the $4.83 billion in 2007's fourth quarter. Subtracting the commissions Google pays to its ad network partners, revenue came in at $4.22 billion.
Net income was $382 million, or $1.21 per share, down from the $1.2 billion, or $3.79 per share, recorded in 2007's fourth quarter.
On a pro forma basis, which excludes one-time items, net income was $1.62 billion, or $5.10 per share. This excludes expenses such as stock-based compensation and costs related to the settlement of the copyright infringement lawsuits brought by the Authors Guild and the Association of American Publishers (AAP) over Google's Book Search service. It also excludes charges such as write-offs of $1.09 billion of Google investments primarily in AOL and Clearwire.
Google exceeded the consensus expectation of $4.95 pro forma earnings per share from financial analysts polled by Thomson Financial, as well as their consensus expectation of $4.12 billion in revenue, subtracting ad network partner commissions.
Google executives expressed continued confidence in the company's business model, which relies overwhelmingly on pay-per-click (PPC) text ads delivered along with its search engine results and in Web pages of third-party sites.
This type of ad is the most popular online format, accounting for about 40 percent of online ad spending, and Google has a market share of about 75 percent of search ad spending, according to various industry estimates.
As is customary for Google executives, Schmidt declined to make forecasts, but he expressed optimism that Google will be able to weather the global economic recession, thanks to its business model and to its management strategies in both the short and the long term.
In particular, Google has been reviewing its large roster of products and services to discontinue those that aren't popular. "Our core focus is on the huge, untapped potential of search and ads," Schmidt said.
Google is constantly improving its search systems, and Schmidt hinted that the company is getting more serious about semantic technology. It would allow Google engines to understand the meaning of queries, instead of just analyzing keywords, the basis of its current approach.
"Wouldn't it be nice if Google understood the meaning of your phrase, rather than just the words that are in the phrase? We have [done] a lot of discoveries in that area that are going to roll out [soon]," Schmidt said.
It also keeps fine-tuning its ad-serving technology to improve the relevance of the ads that it matches to queries and to external partner Web pages, he said. Google wants to apply the successes it has had with search PPC text ads to display ads, where it has been a nonplayer historically but where it plans to make a splash thanks to its DoubleClick acquisition.
Google also sees big opportunities in mobile ads and search with its Android platform, and remains committed to its Enterprise unit, which markets enterprise search appliances and hosted business software to organizations of all sizes.
Jonathan Rosenberg, senior vice president of product management, said Google continues to expand its universal search project, in which it increasingly mixes more search result types, such as news, videos, books and images, into its general Web search engine, instead of just providing regular Web page links.
For the full year 2008, Google had revenue of $21.8 billion, up from $16.6 billion in 2007. Net income rose to $4.23 billion, or $13.31 earnings per share, from $4.20 billion, or $13.29 earnings per share, in 2007.
"We had a strong quarter and what turned out to be a strong year, and business is quite healthy, especially given the tough economic climate," Schmidt said.
Google-owned sites generated 67 percent of the fourth-quarter revenue, while 30 percent came from ad network partners. Although Google didn't say, the remaining 3 percent probably came from smaller sources, such as the Enterprise business. By geography, half of the quarter's revenue came from the U.S. and half from abroad.
Google also announced Thursday it plans to offer employees a voluntary, one-for-one stock option exchange intended to create more incentives for employees to remain at Google.
Employees will get the chance to exchange all or part of their stock options for the same number of new options between Jan. 29 and March 3.
Google expects that new options will have an exercise price equal to the closing price per share of its common stock on March 2 of this year.
In the past two quarters, about 85 percent of Google employees have had at least some of their stock options fall "under water," meaning the exercise price is significantly higher than the current market price of the common stock, Schmidt said.
Paid clicks on Google sites and partner sites increased approximately 18 percent compared with 2007's fourth quarter.
Google finished the quarter with 20,222 full-time employees, up from 20,123 full-time employees as of Sept. 30, 2008.
Google ended 2008 with $15.85 billion in cash, cash equivalents and short-term marketable securities.
In after-hours trading late Thursday, Google shares (GOOG) were up $4.75 at $311.25.
