NEW YORK (Reuters) - Google Inc's quarterly earnings beat Wall Street forecasts as strong advertising sales on its self-branded websites helped the Internet leader defy the gloom pervading the tech sector.
The results, which sent Google shares up 2.6 percent in after-hours trading, were a relief for investors who had been stunned by a series of dismal reports from Microsoft Corp, Intel Corp and other tech companies.
"We have something to feel good about with this Google news in what has been shaping up to be a gloomy earnings period," said Keith Wirtz, president of Fifth Third Asset Management.
Google said fourth-quarter net income fell to $382 million, or $1.21 a share, from $1.21 billion, or $3.79 a share, a year earlier due to impairment charges on its investments in Clearwire Corp and Time Warner Inc unit AOL.
Excluding one-time charges, profit was $5.10 a share, beating the average analyst forecast of $4.95 according to Reuters Estimates.
Revenue rose 18 percent to $5.7 billion -- a shadow of the 50 percent growth levels that Google used to enjoy, but considered by analysts to be a robust performance given the weak economy and corporate cutbacks in advertising spending.
"It was, all things considered, very good numbers," said Wunderlich Securities analyst Martin Pyykkonen. "In this market and relative to the numbers that are being put out -- I would go so far as to say relative to the numbers that Yahoo probably will put out next week -- these will look good."
Google said it will offer employees a one-for-one stock option exchange for "underwater" options as an incentive for employees to stay with the company. The new options will have an exercise price equal to the closing price on March 2.
Google-owned sites, like google.com and google.co.uk generated 67 percent of revenue, or $3.81 billion, rising 22 percent from a year ago. Traffic acquisition costs, the portion of revenues shared with Google's partners, decreased to $1.48 billion.
"It's clear that macroeconomic challenges continue to rob Google of growth, but it seems equally clear that the company continues to make headway in this market, and take share in this market," said Cantor Fitzgerald analyst Derek Brown, who has a buy rating on Google and makes a market in its shares.
Google Chief Executive Eric Schmidt struck a cautious note, saying the last quarter had benefited from the holiday season when many users were seeking retail bargains online.
"Now clearly we're in a worldwide recession as everybody knows, rising unemployment, foreclosures, that sort of thing," he said on a conference call. "But we don't know how long this period will last. We obviously hope it will be short."
The Mountain View, California business ended the quarter with nearly $16 billion in cash, at a time when many tech and media companies are trading at all-time low valuations.
Google Chief Financial Officer Patrick Pichette told Reuters in an interview that the cash reserves allowed Google flexibility "for the right deal at the right price."
The company said the United Kingdom, its second-largest market, showed "some softness" due to the weak British pound. UK revenue fell 1 percent to $685 million.
But the rest of Europe performed better, driven by strong performances in Germany, France and the Netherlands, Google said. Overall international revenue, which accounted for 50 percent of total revenue, was relatively flat.
Paid clicks -- a measure of how often Google gets paid for advertisements alongside its Web search results -- rose 18 percent. Investors have worried that Google's paid search business would face keyword pricing deflationary pressures due to the worsening economy, but the company said search query growth was strong with revenues up in most verticals.
Google's stock has fallen by more than half in the last year as investors expected its pay-per-click advertising format to be hit by the wider advertising market slump.
The shares rose to $314.51 in after-hours trading from their Nasdaq close of $306.50. Just 13 months ago, Google hit an all-time high of $747 as investors bet on its moves into new ad formats such as on mobile phones and YouTube.
Google joins International Business Machines Corp and Apple Inc as the few bright spots in a tech sector hurt by sweeping job cuts and cutbacks in corporate and consumer spending.
It stepped up efforts to rein in expenses, to the relief of Wall Street and investors. Late last year, it confirmed that it was cutting back on the use of contractors and earlier this month it laid off 100 recruiters -- significant for a company which has previously hired at a rapid pace.
(Additional reporting by Anupreeta Das and Jennifer Ablan in New York, Gina Keating and Sue Zeidler in Los Angeles, and Jim Finkle in Boston, writing by Tiffany Wu, editing by Richard Chang)
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