Google beats expectations; business 'quite healthy'

Google reported a big dip in fourth-quarter profits but beat Wall Street expectations for earnings and revenue growth, countering worries that the search giant would find the recession battering its online ad business.

“Business is quite healthy, especially given the tough economic client,” said Google Chief Executive Officer Eric Schmidt in a conference call.

Google reported revenues of $5.70 billion for the quarter ended December 31, 2008, an increase of 18% compared to the fourth quarter of 2007 and an increase of 3% compared to the third quarter of 2008. Analysts had indicated that anything less than 2% quarter-over-quarter growth would be viewed as a negative.

Google reported net income for the fourth quarter of 2008 of $382 million, compared to $1.29 billion in the third quarter of 2008 and $1.56 billion the previous quarter.

Google’s earnings are being watched closely as an overall indicator of the health of the digital economy. There are also some important telecom implications; including the impact on the search company’s $500 million investment in Clearwire – where it took a significant write-down – as well as to what extent its need to focus on its core ad market will impact its overall telecom ambitions.

On that front, Google’s Schmidt specifically pointed to mobile advertising as an important growth area, and Google executives noted the launch of the T-Mobile G1 smartphone, the first device built on Google’s Android operating system.

It’s been suggested that Google, because of the sheer volume of small transactions it enables across its properties, might have something akin to a “magic dial” that would allow it to slightly tweak ad rates and terms to boost its performance in down times. Whether or not that’s true, Google’s paid clicks – counter to expectations – increased 18% over the fourth quarter of 2007 and 10% over the previous quarter.

In recent weeks, Google revealed a number of cost-cutting measures, including eliminating thousands of contractor jobs and, more recently, cutting 100 recruiter positions, an indication that its hiring is slowing significantly. On the product side, it recently closed a few more experimental projects, including Google Notebook and recent Web acquisitions Dodgeball and Jaiku, and also shut down a much-touted project to sell targeted print ads for newspaper customers.