The slumping economy has broken Google’s streak: The Internet search giant said Thursday that it had its first decline in revenue compared with the previous quarter since it went public in 2004, as marketers reined in their online advertising budgets.
But Google is also showing signs that it has adapted quickly to the new economic reality. With its growth slowing sharply compared with a year ago, Google has imposed severe cost controls and slashed expenses. As a result, Google reported net income for the first quarter of $1.42 billion, an 8 percent jump from a year earlier and higher than analysts expected.
“The freewheeling, high-spending days are gone,” said Jeffrey Lindsay, an analyst with Sanford C. Bernstein & Company. “They’ve matured a lot and there is a good dose of rationality.”
The clearest sign of change may be that for the first time in its history, Google’s work force shrank. The company ended the quarter with 20,164 employees, down 58 workers from the end of the year. The decline may be modest, but it is a sharp contrast from just 18 months ago, when Google added more than 2,100 employees in a single quarter.
Google’s rate of growth has slowed in an equally stark fashion as a result of the recession and of Google’s own vast size. Revenue in the first quarter rose just 6 percent to $5.51 billion from $5.2 billion a year ago. First quarter growth was 42 percent in 2008 and 63 percent in 2007.
Despite the abrupt slowing of its growth, Google continued to outperform both its rivals and the overall market for online advertising, which has declined in recent months.
“No company is recessionproof,” Eric E. Schmidt, Google’s chief executive, said in a conference call with investors. “Google is absolutely feeling the impact. Users are still searching, but they are buying less.”
But Mr. Schmidt said: “Despite the tough economic climate, we think Google had a good quarter.”
Whether Google sees any signs of a recovery in the mountains of data it collects from users, Mr. Schmidt would not say. “If you look at the economic situation, we are still basically in uncharted territory,” he said.
Google also said that Omid Kordestani, the company’s first salesman and its top sales executive, would take a new role as senior adviser to Mr. Schmidt and co-founders Larry Page and Sergey Brin. Mr. Kordestani, who had been in his job for 10 years, will be succeeded by Nikesh Arora, currently the company’s president of international operations.
Mr. Kordestani’s move is the third shake-up in Google’s sales operations in just one month. It follows the departures of two Mr. Kordestani’s deputies, Tim Armstrong, who ran sales for the Americas, and Sukhinder Singh Cassidy, who was in charge of the Latin America and Asia-Pacific regions.
Google said net income in the first three months of the year was $1.42 billion, or $4.49 a share, up from $1.31 billion, or $4.12 a share, a year earlier. Adjusted earnings, which exclude the cost of stock options and other items, were $5.16 a share, far higher than the $4.93 a share that analysts expected.
Google’s net revenue, which excludes commissions paid to advertising partners, was $4.07 billion, a 10 percent increase from $3.7 billion a year earlier, and in line with analysts expectations.
“Clearly the upside came from severe cost controls,” said Christa Quarles, an analyst with Thomas Weisel Partners. Ms. Quarles said that capital expenditures, which include spending on data centers, have plummeted to $263 million, from $846 million in the first quarter of 2008. “They’ve been doing a lot of data center efficiency and consolidation,” Ms. Quarles said.
Google’s chief financial officer, Patrick Pichette, warned that those declines could be temporary and said that Google would continue to invest significantly in areas that it considered vital to its business. He said, for instance, that Google has bought a site to build a data center in Finland, but that construction was stalled because of the severe winters there, suggesting that capital expenditures could climb later this year.
Responding to questions from analysts about rumors that Google has had conversations about a possible partnership with Twitter, Mr. Schmidt said he saw interesting advertising opportunities not just in Twitter but also in other real-time communications services. Asked in an interview whether he would like to see Google help sell ads on some of those services, Mr. Schmidt said: “Absolutely.”