Google's quarterly profit topped expectations, helped by cost controls, but Chief Executive Eric Schmidt said the economic environment remains tough with Internet users still searching but buying less.
Shares of the No. 1 U.S. Internet search company initially rose 5 percent on the stronger-than-expected results, but then erased gains to trade flat after hours.
"We're still basically in uncharted territory," Schmidt said on a conference call. "Google is absolutely feeling the impact. Users are still searching but they're buying less. Ultimately, what that really means is the ads are converting less."
Compared to other Internet and media companies that depend on advertising revenue, Google has been extremely resilient to the economic downturn, though its revenue growth has slowed sharply from the heady 50 percent rates it used to enjoy.
Google reported first-quarter revenue of $5.51 billion, up 6 percent from the year-ago quarter but down 3 percent from the 2008 fourth quarter -- its first ever sequential decline. The figure was in line with average Wall Street expectations.
"In one sense, revenue was certainly not robust, but considering the environment people are obviously taking that as somewhat of a comfort that it wasn't any worse," said Martin Pyykkonen, senior analyst at Wunderlich Securities.
"Tougher times but better discipline within the company on the cost management side (meant) that they were still able to come in and beat the bottom line pretty nicely by a few percentage points."
Net profit for the quarter ended March 31 was $1.42 billion, or $4.49 cents a share, up from $1.31 billion, or $4.12 a share, a year earlier.
Excluding special items, Google earned $5.16 a share, ahead of the average Wall Street forecast of $4.93 according to Reuters Estimates. The figure also beat the "whisper number" of $5 per share that some analysts and investors were expecting.
Google executives said lower labor costs, as the company reset performance based bonuses for the new year, kept expenses in line. And after several years in which Google expanded its workforce, the company's headcount declined slightly in the first quarter to 20,164 employees worldwide.
Google announced three rounds of layoffs in the first quarter, although the 200 sales and marketing job cuts announced in March were not reflected in the latest headcount.
"Good quarter considering the environment," said Youssef Squali, managing director at Jefferies & Co. "Cost containment, including capex, was pretty impressive, which is what's needed to make the stock work short-term."