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LIVE: Google's First-Quarter Earnings: Revenues Down, Profits Beat Forecasts, Investors Yawn

Google?? first-quarter earnings are out, and while it managed to beat profit expectations thanks to cost-cutting, revenues were down 3% from the fourth quarter, about what analysts had forecast. From a year ago, sales were up only 6% thanks to what was by all accounts a pretty awful quarter for the entire economy.

On an initial look, investors appear to like what they see. Shares are up almost 6% in after-hours trading, even after a 2.4% rise in an up market overall before the announcement. UPDATE: Shares eased off as the earnings call went on and now are flat or slightly down. The reaction could be volatile well into tomorrow.

The reason for the lackluster response: If investors were looking for any reassurance that online advertising would emerge from its current slump, they didn?? appear to get it. If even Google sees a sequential drop in revenues, woe betide the rest of the online ad business. And even for Google, merely meeting expectations on the top line isn?? something that will get investors enthusiastic because it means business overall is still under pressure.

Gross revenues came in at $5.51 billion and net revenues excluding special items were $4.07 billion, just about even with analysts?expectations. And after years of rampant hiring that slowed down only last year, Google actually managed to cut overall employee count by 58 people from December, to 20,164. That helped Google earn $5.16 a share, noticeably over analysts’ forecast of $4.93 a share. What’s more, free cash flow hit $2 billion, bring its cash coffers to $17.8 billion.

Google said paid clicks, the number of times users clicked on an ad, which is how Google generates revenue, grew 17% from a year ago. That outpaced many analysts’ estimates.

More than ever, these results are being closely watched for any sign of weakness at the search giant, which most analysts had expected would show Google’s first-ever quarter-to-quarter decline in revenues. Investors also will be looking to the results, and executive comments on them, for any signs of further weakness in online advertising overall or, they hope, any signal that things are looking up.

After the jump, I’ll be liveblogging the highlights of the analyst call, which begins at 1:30 p.m. Pacific. I’ll continually update from the bottom, so keep refreshing to get the latest. There’s also a 3 p.m. Pacific Q&A call that you also can listen to here.

Waiting for the call. Nice Hawaiian music is playing on hold...

And we're underway. Here's CEO Eric Schmidt: Despite the tough economic climate, we think Google had a good quarter. GNP down 6% but Google's sales up 6% from a year ago. We're still basically in uncharted territory. The economic environment... remains tough. Google feels the impact. More comparison shopping, lower prices, so marketers are lowering bids. The behavior we're seeing is entirely rational.

We think Google is now well-placed as the recovery occurs.

Our priorities remain unchanged--long-term growth, remain an innovator.

In display ads, highly fragmented market. Google can build a more integrated product that will really improve the market.

One thing that has changed: Omid Kordestani, senior vice president of Global Sales & Business Development, is leaving his position and Nikesh Arora, currently president, International Operations & Senior Vice President, will take over. Kordestani (one of Google's most high-profile executives) will become a senior adviser of the office of the chief executive and founders.

We're heading into the Q2-Q3 seasonally weaker quarters.

Now CFO Patrick Pichette: Advertisers slowed their spend on branding ads vs. performance ads on the Google Content Network, where Google send ads related to content on other Web sites.

Rest of world is starting to feel effects of downturn, though Germany strong.

On expenses: Our Q1 margins demonstrate Googlers' responsible management. Lower labor costs mostly thanks to resetting the bonus plan.

Traffic acquisition costs roughly flat with Q4.

Closed operations and layoffs cost $26 million.

High volatility on options stock price, which effectively required Google to recognize double its previous quarter expense in hedging, or $91 million.

Capital spending came in at $263 million, down considerably.

We're not cutting any corners on our growth agenda.

Now Jonathan Rosenberg, senior VP of Product Management:

Advertisers are willing to take all the clicks we can give them at current cost per click. They're not maxxing out budgets daily.

Talks about overhauls to AdWords, its core advertising system, that have improved return for advertisers at lower cost per click.

Will continue to make big investments in display ads, mobile technology, and Android, its mobile phone software.

In display, just launched a Display Ads Builder to make creation of display ads much easier. Also announced behavioral targeting it calls interest-based advertising.

How searches shed light on state of economy, like big increases in everything from foreclosure and bankruptcy to alcohol and gambling.

Now to the Q&A, I'll relay the biggest questions:

Q: Any abnormal seasonality expected given the recession? Rosenberg: No forward guidance. But seasonality can become more visible in a quarter where you have slower economic growth. In many markets where we now enjoy significant market share, it's less likely that gains can continue enough to overcome seasonality. Timing of Easter this year will make a difference.

Q: Did you see business getting better in March compared with January and February, or not? Pichette: Won't say. The economic situation remains difficult. (So Google isn't counting on that apparent uptick in search ads in March that some researchers saw continuing.)

Q: How is credit crunch affecting small businesses? Kordestani: Did see that effect. Large advertisers see search as marketing expense, and those budgets tended to get cut. In small to medium segment, customers continued spending because search brings in real sales.

Q: Anything more on interest-based display advertising? What's missing in display ads now? Rosenberg: It's a little early to really give deep insights into interest-based advertising. Just beta in Q2. We're very optimistic. Could be very robust. But don't have deep insights from customers yet.

Q: How much more cost containment opportunity is still left? Pichette: Seems to imply not much change overall. Schmidt: It's all about making us a better efficiency engine. Changes in the tightness with which we're run will put us in a stronger position when the economy turns around.

Q: How is DoubleClick integration going? Rosenberg: Close to having AdWords and AdSense pretty well integrated. Also efforts on ad exchange "coming together nicely.

Q: Status of studio deals on YouTube, and will opportunity be ads or fees? Schmidt: We are making very good progress now with small, medium, and even large studios. Our initial focus is advertising.

Q: Status of display efforts and YouTube: Kordestani: Cites progress and interest by advertisers, but not much detail. Schmidt: There's a real synergy between YouTube and display products. YouTube will benefit from very targeted display models.

Q: Is lower capital spending sustainable? Pichette: Says cap ex could be "lumpy" (meaning it will go up and down depending on when spending for projects happens).

Q: Will ad pricing return with the economy? Kordestani: We're not seeing people dropping out of the auction. So expects return to better pricing with better economy.

Q: What will G. do with all that cash? Schmidt: The cash is not burning a hole in our pocket. Will leave it in safe, interest-bearing accounts. Our view at the moment is to remain very very conservative and I don't think that will change anytime soon.

Q: What about Android on netbooks? Schmidt: Overall it looks like Android will have a very strong year. Some other devices besides phones. Some have ported it to netbooks thanks to open-source model.

Q: What's the aim in downsizing of sales team? Kordestani: Always painful for us to do that. We have just been very disciplined in how we measure the performance of each region and whether we had investments that haven't materialized. Looked systematically at performance in each emerging market and cut back those that weren't performing. Pichette: When you grow so quickly in the way we did, it's almost impossible to get everything right every step of the way.

Q: How might Twitter make money? Schmidt: Twitter proves innovation is alive and well in Silicon Valley. You could imagine that to the degree these companies become successful... advertising would be logical. We'd be happy to pursue that with them and all the other companies in that space.

Pichette wraps up: Good quarter despite tough economic conditions. But still in uncharted territory. And the Google model is resilient.

And that's a wrap.

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