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Google beats estimates, for now

Like most everything Google, its reported Q1 results had a good side and a bad side--and the initial stock market reaction to its report reflected that reality. On the good side, Google beat analyst estimates to post an 8.9% increase in net income. On the bad side, it reported its first-ever sequential drop in quarterly sales since the company went public, Bloomberg reports.

In response to the better than expected earnings, shares of Google rocketed up more than 5% in late-day trading shortly after the report. But as investors took time to digest the news in its entirety, Google saw its share prices quickly settled back to earth, closing down 0.7% at $388.74.

The reality is that Google, though well-positioned and currently cash-flush, is also extremely dependent on consumer sentiment, which is currently at rock-bottom levels. As Google CEO Eric Schmidt said in the conference call announcing the results:

"No company is recession-proof. Google is absolutely feeling the impact."

In an effort to blunt the effects of soft sales, Google has cut costs, laying off workers, canceling projects and closing offices. It's also desperately searching for new avenues of revenue, striking new deals for profit-challenged YouTube, including its partnership with Universal Music on Vevo and its latest foray, a new deal with media types like Sony and CBS to run full-length movies and TV shows on YouTube.

But those deals, however promising, aren't liable to turn into cash cows for Google over night. Especially if initial reactions are any measure. (A quick visit to the "Shows" channel on the site this morning is like entering a time portal to the recession-plagued '70s -- highlights include Brian DePalma's scarefest Carrie, and '70s TV shows like Barney Miller and "What's Happening!!" Is that the flavor Google/YouTube is aiming for?)

In the end, a company like Google that derives 95% of its income from search advertising will increasingly see its margins erode as consumers continue to tighten their belts during the recession. And since jobs numbers and consumer confidence are lagging indicators traditionally, Google will need to tread water a bit longer than other less-consumer-dependent businesses. Schmidt is right, when he said Google is well-positioned to take advantage of the recovery, "when it arrives." But how many quarters of sales drops will Google see before that happens?

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