Google machine put to test in first quarter

By Alexei Oreskovic

SAN FRANCISCO (Reuters) - With three rounds of layoffs announced since the year began, Google is showing rare signs of vulnerability.

As it prepares to deliver first-quarter results on Thursday, investors are anxious to see if the Google machine has any visible cracks, or if the No. 1 U.S. Internet search company continues to sidestep the worst of the storm.

"Whenever Internet companies cut costs, people take any cost cutting as a really negative signal," said Sanford Bernstein analyst Jeff Lindsay.

But he said Web searches on Google continue to increase, while revenue from paid clicks -- people clicking on Google's text-based search ads -- appears to be holding up.

"We think they've been cutting costs prudently and sensibly, and it's probably a good indication that they're going to have good margin performance," said Lindsay, who rates Google's stock "outperform."

With global economies sputtering, and one recent report forecasting a 5 percent decline in U.S. online advertising spending this year, business conditions for Google and other Internet companies are as bad as they have ever been.

Analysts expect a sequential drop in revenue for the first time in Google's history as a public company. The average forecast, according to Reuters Estimates, is for first-quarter revenue of $5.53 billion, a 3 percent fall quarter over quarter, or a 6.6 percent gain year on year.

Still, that is better than Google's rivals. Yahoo has projected sales falling as much as 16 percent year-over-year in the first quarter. And some analysts expect revenue at Time Warner's AOL unit to slide 19 percent or more in the first quarter from a year ago.