Google defies economy to beat forecasts; shares rise

By Eric Auchard

SAN FRANCISCO (Reuters) - Google Inc profits surpassed Wall Street quarterly forecasts, sending its shares up more than 10 percent as the Internet search and advertising leader held deepening economic gloom at bay.

Web traffic and revenue growth were strong in all major parts of the world and searches were up for almost every industry using Google, Chief Executive Eric Schmidt said.

But with uncertainty widespread among global business leaders, government officials and media commentators over where the economy is headed, Google is unsure what impact this could have on its advertising dependent business, the CEO said.

"We are all in uncharted territory," Schmidt said of the economy, adding that Google has taken expense control more seriously recently. "We are very realistic about the macro environment, but we are optimistic about Google's future."

Wall Street analysts were pleased by efforts to rein in expenses. Many have complained for years at how Google was "spending like drunken sailors" to hire new employees and install computer data center capacity as its growth exploded.

Google added just over 500 employees in the quarter, about half of them engineers, taking total staff to about 20,000, and the company said it would continue to hire, but cautiously.

Relieved investors said Google appeared to be alone in its ability to weather the economic storm.

"Even in a down market, advertisers are going to be seeking customers. These results separate out Google from the eBays and the Yahoos," said Colin Gillis, an analyst at Canaccord Adams. Ahead of the report, he had prayed aloud that Google results might shore up investor confidence.

Net income for the third quarter rose to $1.35 billion, or $4.24 a diluted share, from $1.07 billion, or $3.38 per share.

Excluding employee stock compensation costs and one-time items, profit rose to $4.92 per diluted share and topped Wall Street's target of $4.75, according to Reuters Estimates.

Revenue, including commissions paid to affiliated advertising sites, totaled $5.54 billion, up 31 percent from the year-earlier quarter but up only 3 percent from the second quarter of this year.

The results were powered by international sales, which rose 41 percent. This came despite the fact that Britain, Google's second largest market, "showed some softness" with 17 percent growth from a year ago but flat compared with the June quarter, Google officials said.

Revenue fell squarely in the middle of forecasts calling for an increase of 26 percent to 37 percent, signaling the company's decelerating growth. Revenue had risen 57 percent in the 2007 third quarter over the same 2006 period.

"'Good enough' given the current climate," Goldman Sach analyst James Mitchell said in a note to investors.

The company dramatically cut back on purchases of property and equipment to $452 million for the quarter ended in September from $697 million in the June quarter.