Google reported earnings for the first quarter. The fears of a meltdown were overblown. Revenue was $5.2 billion, up 42 percent year-over-year and up 7 percent from the fourth quarter in 2007. After traffic acquisition costs (what Google pays its publisher partners) revenues directly to Google were $3.7 billion. Net income for the quarter was $1.31 billion, up 8 percent from the fourth quarter.

A recording of the call is here.

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Paid click growth was 20 percent year-over-year, vastly different than the flattish growth comScore was estimating. Also significant is that this is the first time international revenues exceeded U.S. revenues (51 percent of the total).

The earnings call is about to start. Here are my notes:

Eric Schmidt: Strategy of search, ads, and apps is beginning to pay off. Actually “transformative” in that it is letting people do things they were not able to before.

We are putting more control in the hands of advertisers. Doubleclick is hugely strategic. Allows us to offer a more comprehensive solution.

The recently announced Salesforce.com partnerships allows us to integrate Salesforce and Google apps. by doing these partnerships and investing in the app model, we think people will be able to do more things online in a way that was not possible before like share documents and calendars.

George Reyes: Results include DoubleClick since the acquisition was complete, but not materials in the quarter. Paid click growth on Google.com remains healthy.

Traffic acquisition costs of $1.5 billion in the Q was 29% of revenues, down from 30% in Q4.

19,156 employees at the end of the quarter, including DoubleClick. 20% (?) of U.S. DoublelClick employees have been laid off, and another 15% are expected to leave. Only in the U.S., Internationally, keeping all the headcount.

$1.78B cash flow, capex $842M,

free cash flow $938M, up 50 percent year-over-year

Sergey Brin:

Let me highlight search improvements in last 90 days. have launched more than 100 improvements in search quality. New tailored home pages in international markets, such as Japan. Also better job in foreign countries selecting domestic results.

UI improvements: can search within site on the search results page.

In the past year we have deployed Universal Search. Over the past year since we launched it able to double the number of queries where we show theses, especially images, maps and books.

On maps, have deployed Streetview in more cities (12?). Also including user-contributed data. allow users to correct information on Maps.

We have also been working on difficult queries. We were able to make a very large improvement in what we consider the hardest 20 percent of our queries. that was a big achievement that really stands out n my mind.

Mobile: faster search experience. Mobile available in 40 languages. Mobile search growing very rapidly. Mobile users now get entire library of YouTube videos.

We were pleased with our participation in the 700MHz spectrum auction. We are pleased with the results that will benefit Google and developers alike.

Larry Page: Launched Google Ad Manager for publishers. In testing publishers greatly increased their revenues. Also launched demographic targeting on social networks.

On AdWords, Conversion Optimizer which we launched in Q07 now seeing a lot of adoption. Can pay by conversion instead of by click. In Analytics, we launched industry benchmarking. A very popular feature. We find that people who use Analytics end up increasing their ad spend with us.

On YouTube, AdSense for video and in-video ads, seeing much better clickthroughs than banner ads.

Launched Google Sites, also rolled out offline Docs using Google Gears. We are also very excited about our Salesforce.com partnership [Oh, just buy them already].

Q&A:

UBS: Can you talk about key initiatives at DoubleClick? How are video ads doing? Also update on CFO search.

Eric: On CFO search, we have a whole bunch of interesting candidates. We have not made any offers yet.

?: From a customer relationship point of view on the display side we are taking advantage of our properties,especially YouTube. We are taking advantage of the DoubelClick salesforce to reach new advertisers.

Jonathan: We feel we are in a position to become the world’s largest display ad provider. 90 percent of our ads are available for display ads. Activision used 7 Google products to launch Tony Hawk game [really going after integrated buys].

Merrill Lynch: Can you talk about display model, on network sites or your own? What is driving cost of revenue growth?

Sergey: YouTube is already running display ads. Other sites like Orkut could be candidates. Also making strides on the network. Optimistic on both fronts.

Reyes: Costs are driven by data center expenses, bandwidth costs and some DB amortization.

Q: Is Google not seeing macro impact

Eric: on the macro side, we have looked at this closely and not seeing that at this time. We are well positioned should economics change because our model is so targeted, and targeted advertising does well in most scenarios we feel.

Sergey: I was not referring to advertising improvements. But clickable backgrounds that we eliminated resulted in improvements. Certainly dozens of improvements in advertising quality we launched in the quarter.

Q: Which quality improvements have had the greatest impact on advertising?

Jonathan: There were relatively fewer in terms of impact on the quarter than we normally have because they came at the end. landing page quality improvements. have removed a lot of the made for ad. pages. Also URL matching policy, change in UK trademarks policy, removed restrictions on trademarks in the UK. The one other thing that I saw was just a very modest test, automatic matching beta test, trying to extend reach of advertiser.

Mark Mahaney: Are there enough data points so you know what the economics of mobile search will be vs. desktop search. At 20% year over year paid click growth, that was better than expected. Is that sustainable?

Sergey: On mobile anecdotally, in countries and markets where mobile has been developed, where there are devices and low latency like Japan. Mobile search and ads work very well. I don’t have the exact data. Nothing to dissuade me that it would be substantially different than traditional desktop search. In Europe and the U.S., which are behind but progressing, you will see more usage.

You have smaller screens so cannot display as much but have more information.

Eric: answer to your deceleration Q is No. We k now if we can improve aggregate quality the number of paid clicks will grow. We are very optimistic that this model of staying focussed on quality will give us the strongest ad network.

JPMorgan: You talked about monetization improvement fro social networking. What kind of improvement versus Q4? Also in terms of search quality

Larry: On social networking monetization, it is an area where we have tried a lot of new technologies. Demographic targeting has been successful. The challenge and the opportunity is that there is a lot of inventory. Part of it is just getting the advertising ecosystem built up and targeting in a way that makes sense. We have made some improvements but there are more improvements to be made. It takes time for advertisers to [get up to speed].

Q: Should Yahoo choose to outsource search to you, what benefit would it be to Google’s own network? And can you talk about different economic sectors, what you are seeing?

Eric: On the yahoo Q, we are very excited to be participating in this test. Second week of the test. It is nice to be working with Yahoo and we like them very much. Not appropriate to comment beyond that.

Jonathan: in an economy hat is slowing you would look at sectors like autos and travel. What we see is that clicks in some of those ares grow less than other areas, but on an absolute basis hose areas are doing well, absolute growth. Even in mortgages.

Q: Any updates on China and the team there?

Eric: On the China side, things are moving well. Why don’t we move to the next question. [Hmm, sounds like he really didn't want to talk about that. Actually he just didn't hear it. See response below.]

Q: Which area is growing faster, small self-sign up advertisers or large agencies?

?: We do see bigger advertisers be bigger drivers of growth [because they use more tools].

MorganStanley: As DoubleClick is integrated, will that drive more revenue growth?

Adding more display creates more competition among advertisers. There are plenty of reasons to believe there are positive dynamics.

Q: You mentioned 90% of ad formats are eligible for display, can you talk about effective CPMs of display versus search ads?

Omid: We let advertisers pay any way they like.

Jonathan: what we are trying t do is come up with a way to manage the auction so the text ads compete with the display ads, so three text ads versus one display ad units. That is basically how it works.

Eric Let me on china, we are seeing market share and revenue growth as we learn to operate in that environment. The market is nascent by the Internet is so large. [He wasn't ducking the question before, just didn't hear it the first time].

Q: U.S. revenues were up $29 million. Without DC it could have been flat. Is this sequential growth that you put up this Q is that more a reflection of where we are in the search cycle in the U.S.

Eric: We know what it is not, not macro economic. could have something to do with timing of deals, maturity of search advertising n the Us.

Jonathan: you have to be careful when you look at annualized YOY comparison. In the base Q you are comparing to, this Q last year we added a lot of big partners to AdSense. relative to that year we did not have a lot of big partners to add. It is primarily a factor for that. Also the AdSense for Domains cleanup.

Eric: This is the Q our international sales are 51 percent, I don’t think that number is going to go down. this is the quarter the sales team made Google a truly international company.

Call is over.