Update: Google grows both revenue and profit in Q3

The company believes the economy is on its way back from the downturn

Google grew both its revenue and profit in the third quarter, which ended Sept. 30, registering results its CEO called "strong" and that exceeded Wall Street expectations.

The company now considers the worst of the recession to be over so it has decided to step up its investments in areas like hiring and acquisitions.

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"We're very optimistic about the future. We now have the business confidence to invest heavily in the next phase of innovation," Google CEO Eric Schmidt said during a conference call to discuss the financial results.

"We're open for business, making strategic acquisitions both large and small," he added.

Google had revenue of US$5.94 billion, up 7 percent compared with 2008's third quarter, the company said Thursday. Of that total, it paid out $1.56 billion, or 27 percent, as commissions to its advertising partners and, to a lesser extent, as fees to other partners. Thus, net revenue was $4.38 billion.

Net income came in at $1.64 billion, or $5.13 per share, up from $1.29 billion, or $4.06 per share, in 2008's third quarter.

On a pro forma basis, which excludes certain items, net income was $1.88 billion, or $5.89 per share, compared to $1.56 billion, or $4.92 per share.

The consensus estimate from financial analysts was for earnings per share on a pro forma basis of $5.42 and net revenue, deducting commissions, of $4.24 billion.

"We're very pleased with our Q3 results," said Google CFO Patrick Pichette. "Our business was strong across the board."

"We saw stabilization or improvement in most of our major markets," Pichette added.

Paid clicks on ads served on Google sites and on partner sites increased 14 percent, while the average cost-per-click fell 6 percent, Google said.

The company ended the quarter with cash, cash equivalents and short-term marketable securities totalling $22 billion, and with a global staff of 19,665 full-time employees, slightly down from the second quarter.

Google generated 53 percent of its revenue from international markets, up from 51 percent in 2008's third quarter.

Schmidt didn't provide much detail on what companies Google might be looking to acquire, saying that the most frequent types of companies it buys, at a rate of about once a month, are small ones, relatively inexpensive and with a specific technology it's interested in.

Along those lines, Google would be interested in companies that could help it fill in gaps in the development of products like its Chrome OS, its display advertising technology and specific types of search services, he said.

"We're certainly looking for larger businesses to buy but in those cases it would have to be some significant strategic rationale, some acceleration for revenue, some major, major user base we don’t have access to," Schmidt said, adding that those bigger acquisitions will be more infrequent.

While Google mulls making more acquisitions, it will also continue to invest in internal development. Jonathan Rosenberg, Google's senior vice president of product management, singled out a new AdWords user interface for advertisers as one of the company's biggest investments of the year so far. Virtually all advertisers have been transferred over to the new user interface, which represents the biggest overhaul of the AdWords system ever, he said.

Google is also investing heavily in developing new ad formats, including a new one being tested for local ads, designed to make it easy for small businesses to sign up by filling out a one-page form and paying a monthly rate, Rosenberg said. That beta local ad service also includes a Web page for businesses that don't have one, populated with their information.

Another area of major investment this year has been the improvement of search user experience through the development of new features to help users refine queries and filter search results, he said.

"We see users today coming to us with much harder queries than they used to, so we're adding more ways for them to work with the results and get what they need," Rosenberg said.

Schmidt also addressed this topic, saying Google had implemented about 120 search quality improvements during the third quarter, and will continue to constantly improve its search technology now and in the future.

"We want to get to the perfect search engine," Schmidt said.

This story was updated on October 15, 2009

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