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Google's quarterly revenue, profits increase

Google isn't growing as strongly as it was a year ago, but 7 percent revenue growth exceeded analyst expectations amid signs the ad economy is getting stronger.

Updated 1:30pm PDT with a few additional details, and again at 2:40pm following the conference call.

Google's revenue grew more strongly than expected during its third fiscal quarter, in a sign that ad spending is getting back on track.

Excluding traffic acquisition costs of $1.56 billion paid to Google partners, the company reported revenue of $4.38 billion, exceeding analyst estimates of $4.24 billion and backing up CEO Eric Schmidt's recent statements that Google was seeing more spending from advertisers. Overall revenue was $5.94 billion for the period ending September 30, an increase of 7 percent compared to the third quarter of 2008.

Schmidt echoed those statements on a conference call following Google's earnings release. "While there's obviously a lot of uncertainly about pace of economic recovery, we believe the worst of the recession is behind us," he said.

Net income according to generally accepted accounting principles was $1.64 billion, an increase of 27 percent compared to the same period last year. That's equivalent to earnings per share of $5.13. Excluding costs related to stock-based compensation, earnings per share were $5.89, exceeding analyst estimates of $5.42.

That increase in profitability was probably helped by a decrease in employee headcount. As of the end of the third quarter, Google had 19,655 people working for it around the world, as compared to 19,786 employees at the end of its second quarter.

Revenue from ads placed on Google's sites rose 8 percent to $3.96 billion, while revenue from ads sold through the AdSense program to third-party Web sites increased 7 percent to $1.8 billion. YouTube took additional steps toward profitability as well, but still isn't quite there, although Google reported that major advertisers such as Hewlett-Packard and McDonalds are seeing positive results from campaigns placed on YouTube.

Cost-per-click was down 6 percent compared to last year but up 5 percent compared to the second quarter, indicating that prices for Google ads are still below historical levels but are strengthening. Patrick Pichette, Google's chief financial officer, cautioned analysts on the conference call that some of the cost-per-click fluctuation is also influenced by changes in currency exchange rates, and that Google is increasingly doing business in countries where the cost-per-click is lower than in established economies. Along those lines, international revenue also increased as a percentage of Google's overall total, rising to 53 percent of the total as compared to 51 percent last year.

Google plans to start investing significantly during the rest of the year, planning to increase hiring, acquisitions, and capital expenditures. It tread cautiously in those areas during the last year, although Google was able to see infrastructure benefits without heavy capital expenditures by investing in software enhancements for servers with multicore processors, which made the whole operation more efficient, Schmidt said.