The results are in: investments in AOL and a company called Clearwire contributed to a 68% drop in Q4 profit for Google but an 18% increase in sales helped the beat analyst expectations.

All told, Google achieved net income of $382m on total revenue of $5.7bn. Sales, excluding commissions paid to partners, was $4.22bn, beating the consensus estimate of $4.12bn.

Notwithstanding the $726m and $355m charges Google took on its AOL and Clearwire investments, Q4 2008 proved to be about as good a quarter as anyone could have expected given the economy, which Google is clearly not immune to.

Key stats:

  • Total paid-click growth was up 18% year-over-year and 10% quarter-over-quarter on a global basis.
  • AdSense revenue grew a modest 4% to $1.7bn.
  • Traffic acquisition costs were $1.5bn, which accounts for 27% of ad revenue. This was down from 28% in Q3 2008.

A crucial part of Google’s strategy going forward is decreasing expenses. It made a substantial effort on that front in Q4 2008 and as we’ve seen recently, it is continuing to make an effort here by ditching projects that weren’t producing. Perhaps the most telling metric when it comes to running a tighter ship: the total number of people Google employs grew by only 100 during the quarter.

While Google’s rapid growth in the number of employees it hires may be a thing of the past, the retention of the employees it does have is important. Because of the dramatic decline of Google’s stock price, 85% of its employees’ stock options that are underwater. To address this, Google announced a voluntary stock exchange program that allows employees to trade their old options for new ones with a longer vesting period. This is quite generous (the company anticipates taking a $460m charge to make this happen).

Moving on to the information that is most valuable to SEMs and SEOs.

Search is still Google’s breadwinner and the company naturally continues to focus much of its efforts in this area. According to Jonathan Rosenberg, SVP of Product Management, Google made over 350 “search quality improvements” in 2008 in the following areas:

  • Index size and latency. In short, the size of the index grew and Google also focused on making sure content was indexed in a timely manner.
  • Universal search. Rosenberg stated that Google “tripled the number of queries that trigger different types of results across images, videos, news, blogs, websites, and of course, books.
  • Mobile search. Google is seeing more mobile search volume and is working to make sure the mobile search experience is as good as the web search experience.
  • Ad quality. Reminding listeners that Google’s ad coverage had “dipped” earlier in the year, Rosenberg stated that Q4 2008 was “one of our strongest quarters for ad quality improvement.” He said this will continue to be a focus and noted that because most Google advertisers don’t hit their daily budget limits, Google is eager to find ways to deliver more clicks. Hopefully they won’t follow in the footsteps of Yahoo.

In his high-level overview of Google’s business, CEO Eric Schmidt stated:

“The results, we think, show that advertisers’ value targeted measurable ads. In the fourth quarter advertisers invested where ROI was the highest, and it was online. That’s one of the few really good stories in the past quarter. Our sales force went out to tell people it’s really important to understand that revenue is what you need, and the quickest way to get revenue is to use targeted Google advertising and its strategy had worked very well for us.”

“Consumers, of course, are also using search for comparison shopping and that
helped as well.”

While he expressed confidence in Google’s prospects and assured listeners that Google has more than enough to make it through the downturn, he went on:

“Now, looking at the economic situation which is on everyone’s minds, in some
ways Q4 was the easy part. After all, we had holidays, had excess inventory and
so forth. Now we’re in a situation, where last quarter we said it was going to
be unchartered territory, it’s now clear we’re in a worldwide recession as
everybody knows, rising unemployment, foreclosures, that sort of thing. But we
don’t know how long this period will last.”

Perhaps Q4 2008 was the easy part and it is worth considering that expectations had gradually been lowered for Google’s quarter. But the company’s track record of managing to come through is a testament to its ability to adapt and a testament to the search advertising market it dominates.

What 2009 holds is anyone’s guess but if you’re the leaner and meaner Google, you’re probably feeling about as confident as anyone in the technology industry these days.