October 18, 2007 / 8:33 PM / 12 years ago

UPDATE 3-Google quarterly profit jumps 46 pct, costs capped

(Adds analyst quotes, details, byline, updates shares)

By Eric Auchard

SAN FRANCISCO, Oct 18 (Reuters) - Web search leader Google Inc (GOOG.O) reported on Thursday a 46 percent rise in profit that topped analysts’ expectations, as revenues grew 57 percent and comfortably outpaced expense growth, reassuring investors.

Google said it would continue significant capital spending of about half-a-billion dollars a quarter on new data centers and networks, but that it had put in place controls to rein in hiring, with staff numbers growing about 15 percent a quarter.

Third-quarter operating profit margins improved over the previous quarter and analysts said Google’s spending was more in line with growth than three months earlier, when it surprised the market with a jump in operating expenses.

Shares of Google inched into new record territory in extended trade after the results, trading up to $641.95 from a regular session close of $639.62. The stock is up 39 percent so far in 2007 versus 16 percent for Nasdaq.

“They seem to have grown better than anybody expected and seemed to have improved margins,” said Jefferies & Co. analyst Youssef Squali. “I think they were more cost-conscious this period than last.”

Net income rose to $1.07 billion, or $3.38 per diluted share, compared with the year-earlier quarter’s $733.3 million, or $2.36 per diluted share. Excluding one-time items, profit was $3.91 per share in the latest quarter, versus the Wall Street average target of $3.77, according to Reuters Estimates

Revenue rose 57 percent to $4.23 billion, compared with an average analyst forecast of $4.13 billion. Ever-larger numbers mean its growth rate is down from 70 percent in the third quarter of 2006 and 96 percent in the same period of 2005. Excluding payments to affiliates carrying ads from Google, revenue grew 61.5 percent.

International business made up nearly half of revenue.

Google has moved rapidly over the past year to extend its reach beyond text-based, pay-per-click Web search advertising into a variety of new markets, including online video, television, radio and print advertising.

“Television is one area that looks like it is going to grow very quickly,” Chief Executive Eric Schmidt told Reuters in an interview. Like existing online ads it delivers, digital cable and satellite systems make it easy to target and measure what advertising is viewed by which types of customers, he said.

Google has also expanded into enterprise software, the traditional fiefdom of Microsoft Corp (MSFT.O).

Analysts had expected fourth-quarter growth to slow to 47 percent, which is still four to five times faster than rivals Yahoo Inc YHOO.O and Microsoft.

“The company continues to execute and outpace its competitors,” Goldman Sachs analyst Anthony Noto told investors in a research note. He said the results set the stage for analysts to push up forecasts on Google for 2008 and 2009.

Google plans to hold a meeting with Wall Street analysts at its Mountain View, California headquarters next Wednesday.

Operating expenses totaled $1.25 billion, or 30 percent of revenue, despite the fact that its headcount grew 15 percent to 15,916 employees during the three months ended in September.

The company put in place tighter controls on hiring in the past quarter that should help it further control cost increases from now on, Schmidt told investors on a conference call.

Last quarter, Google shocked investors when expenses shot to 31 percent of revenue from 27 percent in the first quarter. Stock compensation dipped to $198 million in the third quarter from $242 million for the second quarter ended in June.

Traffic acquisition costs, or payments to affiliated Web sites such as AOL or Ask.com to which Google serves up online advertisements, were $1.2 billion and 29 percent of total ad revenue, down from 30 percent in the second quarter.

Google led the U.S. Web search business with a 57 percent market share in September, up from 56.5 percent in August, according to comScore Inc. It is even more dominant globally, with more than 70 percent of the audience for Web searches.

Additional reporting by Chris Sanders and Paul Thomasch in New York and Gina Keating and Sue Zeidler in Los Angeles, editing by Braden Reddall

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