Google profit zips past forecast

SAN FRANCISCO — Google's rapidly rising profit soared to new heights in the third quarter as its Internet-leading search engine churned out a sevenfold earnings increase that blew past analyst expectations.

Google announced yesterday that it made $381.2 million, or $1.32 per share, during the three months ended in September. That compared with net income of $52 million, or 19 cents per share, a year ago. Last year's results included a $201 million charge to account for a legal settlement with rival Yahoo!

If not for charges related to a recent acquisition and employee stock options issued before the company went public 14 months ago, Google said it would have earned $1.51 per share.

That figure easily exceeded the consensus estimate of $1.36 per share among 31 analysts surveyed by Thomson Financial. Even the most bullish analysts hadn't expected Google to fare as well as it did; the highest earnings estimate had been $1.46 per share.

Google's revenue for the quarter totaled $1.58 billion, nearly doubling from $805.9 million last year. After subtracting the commissions that Google paid to other Web sites in its advertising network, the revenue stood at $1.05 billion, exceeding the Wall Street estimate of $944 million.

The results were released after the stock market closed yesterday. Google's shares fell $5.50 to close at $303.20, then surged by $32.55, or 10.7 percent, in extended trading.

"We surprised ourselves this quarter," said Google CEO Eric Schmidt. "Business was much stronger than I expected."

The profit — the highest for any three-month period since Google's inception seven years ago — came during a typically slow season for Internet companies because people spend less time at their computers during the summer.

"Google continues on a very strong ramp," said Mark Stahlman, an analyst at Caris in New York. He has an "above average" rating on the shares and doesn't own the stock. "This is a better than expected earnings and revenue report."

Google executives also had warned that it might be difficult for the company to post substantial increases from last year's third quarter when a flood of publicity devoted to its August 2004 initial public offering helped drive more traffic to its Web site.

But the introduction of new products, such as instant messaging, and upgrades to existing services, such as mapping, helped Google attract more summer traffic than anticipated, executives said during a conference call yesterday.

Large corporations were lured by Google's addition of a third ad spot above some search results and new features that let advertisers target specific Web sites.

By increasing the number of ads that appear beside search results, which generate most of Google's revenue, Google bolstered sales by about $26 million, Jordan Rohan, an analyst at RBC Capital Markets in New York said in an Aug. 23 note.

"You would think when we add more advertising linked we're just increasing revenue," Larry Page, who co-founded Google with Sergey Brin, said during the conference call. "When we really do this we do more complex things."

Excluding ad commissions, Google's third-quarter-revenue growth accelerated by 18 percent from the second quarter. Not even the most bullish analyst thought Google's sequential revenue increase would be above 10 percent.

Even as the company diversifies, Google's online search engine remains its moneymaking hub, shrugging off stiffening competition from its biggest rivals, Yahoo! and Microsoft.

Google handled 45 percent of U.S. search requests last month, outdistancing 23 percent for Yahoo! and 12 percent for Microsoft's MSN, according to research released yesterday by Nielsen/NetRatings.

As an ever-growing audience flocks to Google's search engine to find information, more advertisers want to have their Web links displayed alongside search results related to their products and services.

The increased ad demand is enabling Google to boost its profit at a breathtaking pace — something it needs to do to support the lofty price of its stock, which has more than tripled since the company's IPO.

Based on yesterday's extended trading, Google's shares could easily eclipse their all-time high of $321.28 today.

In its quest for more profit, Google wants to build a free high-speed wireless Internet access service in San Francisco. The city is weighing its plan as well as 24 others.

Comments by analyst Stahlman

and Google co-founder Page,

and information on Google's third ad spot provided by Bloomberg News.