SEATTLE: Google is not immune to the recession. That's the message swirling around the search giant in the wake of its first quarter earnings report.

Google reported revenues of $5.51 billion for the first quarter, an increase of 6 percent compared to the year-ago period but a 3 percent decrease compared to the fourth quarter of 2008. Sales after subtracting commissions to its partners totaled $4.07 billion.

Google's net income was $1.42 billion, or $4.49 per share, compared to net income of $1.31 billion, or $4.12 per share, in the year-ago period. That met Wall Street expectations, but showed that Google is not escaping the impacts of a down economy. Still, Google remains optimistic.

'Google had a good quarter given the depth of the recession -- while revenues were down quarter over quarter, they grew 6 percent year over year, thanks to continued strong query growth. These results underline both the resilience of our business model and the ongoing potential of the Web as users and advertisers shift online,' said Google CEO Eric Schmidt. 'Going forward, our priority remains investing for the long term to drive future growth in our core and emerging businesses.'

Cost Cutting Pays Off

In more good news, Google-owned sites generated revenues of $3.70 billion, or 67 percent of total revenues, in the first quarter of 2009. That marks a 9 percent increase over first quarter 2008 revenues of $3.4 billion and a 3 percent decrease from fourth quarter 2008 revenues of $3.81 billion.

Meanwhile, Google's partner sites generated revenues, through AdSense programs, of $1.64 billion, or 30 percent of total revenues, in the first quarter of 2009. That marks a 3 percent decrease from first quarter 2008 network revenues of $1.69 billion and a 3 percent decrease from fourth quarter 2008 network revenues of $1.69 billion.

Revenues from outside of the United States totaled $2.88 billion, representing 52 percent of total revenues in the first quarter of 2009, compared to 51 percent in the first quarter of 2008 and 50 percent in the fourth quarter of 2008. Had foreign exchange rates remained constant from the fourth quarter of 2008 through the first quarter of 2009, Google said its revenues in the first quarter of 2009 would have been $120 million higher.

Google's moves to cut costs were visible in its first quarter earnings report. Operating expenses, other than cost of revenues, were $1.52 billion in the first quarter of 2009, or 28 percent of revenues, compared to $1.65 billion in the fourth quarter of 2008, or 29 percent of revenues. The operating expenses in the first quarter of 2009 included $774 million in payroll-related and facilities expenses, compared to $890 million in the fourth quarter of 2008.

Google's Shift Toward Display

Search is the strongest area of online advertising in an uncertain economy -- and Google is by far the most dominant company in search. That puts Google in a strong position to weather the economic storm, but analysts said the search giant can expect to feel a pinch until the recession ends as would-be customers shrink advertising budgets.

Google made less money partly because advertisers pulled back a little and partly because users were clicking and buying less, but Google still performed well because the company is much stronger than its rivals in terms of search scale and leadership, according to Greg Sterling, principal analyst at Sterling Market Intelligence.

'Google also benefits as advertisers shift budget from traditional media to online and shift into performance models rather than pure CPM-brand advertising,' Sterling said. 'One of the things that Google discussed yesterday a good deal on the earnings call was display advertising and what the company is doing to bolster its display offerings, such as YouTube changes and interest-based ads.'