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Google 3Q Profit Soars 46 Percent

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MICHAEL LIEDTKE | October 18, 2007 11:18 PM EST | AP

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SAN FRANCISCO — Google Inc. rode the Internet advertising wave to another sparkling quarter, justifying the investor confidence that lifted its stock price by more than $100 during past month to establish the online search leader as Silicon Valley's most valuable company.

Overcoming a traditionally slow season for Web surfing, Google said Thursday that it earned $1.07 billion, or $3.38 per share, for the three months ended in September. That was a 46 percent improvement from net income of $733.4 million, or $2.36 per share, at the same time last year.

If not for the cost of awarding stock to its steadily expanding work force, Google said it would have earned $3.91 per share. That topped the average estimate of $3.78 per share among analysts surveyed by Thomson Financial.

Revenue for the period totaled $4.23 billion, a 57 percent increase from $2.69 billion last year.

After subtracting commissions paid to its thousands of advertising partners, Google's revenue stood at $3.01 billion _ about $70 million above the average analyst estimate.

The performance represented a return to form for Google after its second-quarter earnings disappointed Wall Street. The company has surpassed analyst estimates in all but two of the 13 quarters since its August 2004 initial public offering.

"We're strong and getting stronger," Google Chairman Eric Schmidt said in an interview Thursday. "What I am most pleased about is our model works."

Wall Street already had been counting on a stellar quarter from Google, especially after its smaller rival, Yahoo Inc., beat analyst expectations with its third-quarter earnings released earlier this week.

The enormous expectations contributed to a 19 percent increase in Google's stock price during the past month, propelling shares through $600 for the first time.

Google shares added $6.14 Thursday to finish the regular session at $639.62, leaving the nine-year-old company with a market value of just below $200 billion. That enabled Google to edge past Cisco Systems Inc. as Silicon Valley's most valuable company.

After the third-quarter results came out, Google shares rose $3.88 in after-hours trading, signaling the stock will likely reach a new peak on Friday.

Google is thriving because advertising that once went to television, radio and newspapers is shifting to the Internet, where Google's search engine steers a highly effective system for finding prospective customers.

Although it relies on complex technology, Google's formula is fairly simple. As it processes a search request, Google also scans its database for text-based ads related to the same topic as the query and displays the commercial messages along the side and top of the results page.

Google gets paid when someone clicks on an ad on its pages or one of its partners' sites.

There's ample opportunity to display the ads, with Google fielding about 1.2 billion search requests worldwide per day, based on the latest data from comScore Inc. That's more than quadruple the number of requests handled by Yahoo, which runs the second largest search engine.

While becoming even more dominant in search, Google also is branching in new directions that are creating new ways to sell ads and opening up potential new revenue channels in the software applications market.

In the past few months, Google unveiled a way to show text-based ads across the bottom of videos supplied by its YouTube subsidiary and also began distributing ads within "widgets" _ the interactive capsules that are becoming Internet staples.

"Each of these initiatives give advertisers new and interesting ways to build relationships with customers," Schmidt told analysts during a conference call.

Google is hoping to become even more powerful by buying an online ad placement service, DoubleClick Inc., for $3.1 billion. Facing protests from privacy activists as well as Google's rivals, the deal is under review by antitrust regulators in United States and Europe.

Schmidt said Google remains confident regulators will approve the acquisition, although he declined to set a timetable for obtaining the necessary clearance. When Google first announced the deal, it hoped to take control of DoubleClick before 2008.

In sign of its ambitious expansion plans, Google added another 2,130 employees in the third quarter _ more than in any three-month period in its history. Management said the summer additions included about 1,000 hires right out of college and 300 employees inherited in its $625 million acquisition of e-mail specialist Postini Inc.

Schmidt assured analysts Google is closely monitoring the size of its work force and indicated the hiring will be more modest in the current quarter.

As of Sept. 30, the company's payroll totaled 15,916 people, including hundreds who have become millionaires because Google's stock has increased by more than sevenfold from its IPO price.

(This version CORRECTS last year's third-quarter revenue was $2.69 billion, not $2.67 billion.)