Reporting from San Francisco — Google Inc. beat Wall Street expectations Thursday as earnings rose 32% with a resurgent wave of businesses spending more on advertising to lure online consumers.
The better-than-expected third-quarter results quieted concerns that the Internet search giant was wasting time and money on futuristic projects from windmills to automated cars as it faces rising competition from Facebook Inc., the world's most popular social networking site.
"Google is back," BGC Partners analyst Colin Gillis said. "Google is showing that it is able to be Google and still deliver results."
Shares closed down $2.37 at $540.93 but climbed nearly 10% in extended trading, after Google released its results.
Net income rose 32% to $2.2 billion, or $6.72 a share, from $1.6 billion, or $5.13, even as Google added more than 1,500 employees in the third quarter and spent more than four times as much on data centers and other equipment than it did a year ago.
That's because Google, which dominates Internet search advertising, was able to charge advertisers higher rates for ads and more Internet users clicked on those ads. Paid clicks, the number of times a consumer clicks on an ad, increased 16% from a year ago. The cost per click rose 3% from a year ago.
Excluding certain expenses, Google earned $7.64 a share, outpacing the $6.69 a share analysts had predicted.
Revenue rose 23% to $7.3 billion. Excluding commissions paid to its advertising partners, Google's revenue hit $5.5 billion, about $200 million more than analysts expected.
"We're on this growth agenda at full throttle," Chief Financial Officer Patrick Pichette said in a conference call with analysts.
Google is pushing hard into new areas such as searches on mobile phones. Its Android software has soared in popularity with consumers. Mobile advertising sales are on track to top $1 billion a year, said Jonathan Rosenberg, Google's senior vice president for product management. Revenue from display advertising — ads with images and video on YouTube and other websites — is also gaining momentum and could top $2.5 billion annually, Rosenberg said.
This was the first time that Google offered tangible numbers to show that mobile and display advertising significantly boosts revenue.
But analysts remain concerned about the jump in operating expenses, which were up 22% in the quarter, propelled by a 37% increase in general and administrative costs, including stock-based compensation. Most controversial is Google's spending on renewable energy projects, automated cars and other projects that do not generate revenue and weigh on its profit margins.
"The boys are definitely spending," Gillis said, noting that the third quarter benefited from a drop in tax rates. "After hours, investors were drinking champagne. Tomorrow, they may just have a beer to celebrate."
Google is a bellwether for Internet advertising. According to EMarketer, advertisers spent $6.15 billion on Internet ads in the third quarter, up 11.8% from the same period in 2009. For the full year, spending on U.S. online advertising is set to reach $25.1 billion, of which search ads will account for 49.3% of total revenues.