Google net tops expectations and shares rise

SAN FRANCISCO (Reuters) - Google Inc. (GOOG.O) reported on Thursday a 69 percent rise in quarterly net profit, easily beating expectations, helped by market share gains and a lower tax rate, sending its stock up 3 percent.

Net income in the first quarter rose to $1.0 billion, or $3.18 per share, from the year-earlier quarter's $592 million, or $1.95 a share. The result beat the average Wall Street forecast of $2.91 per share, according to Reuters Estimates.

Excluding stock-option costs, profit was $3.68 a share, up from the $2.29 a year ago. Wall Street had predicted a profit, excluding options, of $3.31 a share. A one percentage-point drop in tax rate, year-to-year, helped Google beat forecasts, said David Garrity, research director at Dinosaur Securities.

Chief Executive Eric Schmidt sounded exuberant on a conference call following the results, but cautioned that growth typically slows in the middle of each year.

"We are ecstatic about our financial results this past quarter," Schmidt said. "Our core business is very strong. It is the core business that is driving our success."

Gross revenue rose 63 percent to $3.66 billion, including traffic acquisition costs of $1.13 billion paid to Web sites that act as billboards for Google ads. It said the terms of some of the company's big new advertising partnerships were driving up the costs of acquiring customers.

Wall Street expected revenue, on average, of $3.57 billion, with estimates ranging from $3.43 billion to $3.70 billion.

Hiring grew 15 percent to 12,238 at the end of March, reflecting Google's expansion in many new directions.

Google shares, which had dipped $4.36 to close at $471.65 in the Nasdaq regular-session, rose to $485.50 following the results in after-hours trading.

STILL GROWING

As Google gets bigger, revenue growth is set to decelerate to about 50 percent this year from 67 percent in 2006. Meanwhile, it is spending heavily on new services and data centers to run them, putting pressure on margins.

"Their gains have extended beyond the point where most people thought was possible," said Rick Meckler, president of money manager LibertyView Capital Management. "For now it's still growing at a phenomenally healthy pace."

These slowing growth trends have weighed on shares, which saw spectacular gains after its initial public offering in 2004. The stock was up just 3.5 percent so far in 2007 ahead of the report.

Google is the world leader in pay-per-click advertising that runs alongside search results on its own sites and affiliated Web sites that serve as advertising partners.

It derives roughly 99 percent of its revenue from such text ads, although it is moving quickly to expand into online video, graphical, television, radio and print advertising markets.

"We are certainly investing in those businesses and they are going to be significant," Schmidt told Reuters in an interview, when asked whether any of these new markets would make a material difference to revenues this year or next. "We won't say what quarter or year. It is coming," he promised.

But its rapid expansion into new markets has led entrenched rivals to launch a spate of attacks on the Web search leader.

Since last month alone, media conglomerate Viacom (VIAb.N) filed a $1 billion lawsuit accusing Google and its YouTube video sharing site of tolerating the piracy of copyrighted television programs. New Tribune Co. TRB.N owner Sam Zell has accused Google of having a business model built on theft.

Schmidt is adamant Viacom's suit is a business negotiating tactic aimed at winning a richer licensing deal. He declined to comment on whether Google was trying to revive such talks. "At the moment, they are suing us, and we don't like that," he said.

Meanwhile, Google's $3.1 billion deal to buy DoubleClick, its biggest acquisition to date, has drawn howls of "antitrust" from competing software, phone and media company. DoubleClick helps advertisers conduct targeted ad campaigns and expands Google's power in the fast-growing online advertising market.

(Additional reporting by Gina Keating and Sue Zeidler in Los Angeles, Tiffany Wu in San Francisco and Herb Lash in New York)