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All eyes on Google after a turbulent quarter

Coming of age at an inopportune time; getting between Microsoft, Yahoo

By John Letzing, MarketWatch

Last Update: 4:28 AM ET Apr 11, 2008

SAN FRANCISCO (MarketWatch) — Google Inc.’s first-quarter earnings report,
coming Thursday, will shed light on a period that’s been rife with speculation
that the hard-charging company has faltered in the face of an economic slowdown.

The report could also set expectations — fairly or not — for rival Yahoo Inc.’s
earnings announcement, expected the following week.

Widely noted comScore Inc. data issued during the quarter revealed a dramatic
slowing in Google’s (GOOG) paid clicks, or the number of times users clicked on
sponsored search links and generated revenue for Google. That stirred a heated
debate over the cause of the slowdown — while Google shares were retreating more
than 30% from their level at the start of the year.

Analysts expect Google to post earnings of $4.57 a share for the quarter, on $3.6
billion in net sales, according to FactSet Research. That compares with earnings
of $3.68 a share in the same period a year earlier, when net sales were $2.53
billion. The company doesn’t make public its own financial forecasts.

Google and others have pointed out that the company itself has had a hand in the
slowing of paid-click growth, having taken steps to weed out search advertisers
incapable of paying relatively higher rates for keywords. But that’s introduced
tension, as Google now scrambles to wring more revenue out of a smaller pool of
deep-pocketed corporate advertisers, while pricing out many of the smaller
outfits that helped build the company into an Internet phenomenon.

Google’s quality initiatives have generally been lauded as forward thinking by
industry analysts. Those analysts describe the steps as reflecting a sort of
coming of age for Google, as it begins targeting the larger companies that will
contribute most to its future growth.

But the initiatives have also tripped alarms up and down a Wall Street that’s
grown increasingly attuned to any sign of weakness in the current economic
atmosphere.

Dissonance between Silicon Valley’s and Wall Street’s understanding of Google has
been a common theme for the company — but the paid-click issue has been
aggravated by the slowdown, and analysts aren’t in a forgiving mood.

“We’re not convinced its just a ‘repositioning’ of their paid clicks; we think
there’s evidence that the recessionary economic environment has caused a slowing
of consumer activity, including what they do on the Internet,” Stanford Group
analyst Fred Moran said in an interview.

Moran threw cold water on the popular view that Google’s business model was
immune to economic ills: “No advertising-supported medium is truly immune to the
cycles of the economy — that should become clearer.”

In addition to challenges from the economy, Google has also been facing a more
dramatic assault by Microsoft Corp., which two months ago made an unsolicited bid
for Yahoo (YHOO), largely to bolster its attack on Google. The cash-and-stock
offer was initially valued at $44.6 billion. Yahoo has responded to Microsoft’s
(MSFT) gambit by exploring a number of alliances and alternatives to fend off the
software behemoth.

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