google reports profit surge

In another sign that the economy may be coming back online, Web search giant Google Inc. surprised Wall Street with a 27% jump in third-quarter profit, as Internet advertisers spent more on ads -- and buyers spent more time clicking on them.

Computer giant IBM also reported higher-than-expected profit Thursday, adding to hopes that the vitality of the technology sector might be a bellwether for a larger recovery.

“We believe the worst of the recession is behind us,” said Google Chief Executive Eric Schmidt in a call with investors, pointing to strong performance in all of the company’s operations. “We now have the business confidence to invest heavily in the next phase of innovation.”

Google and IBM joined a growing parade of technology companies reporting better-than-expected results this month, including chip makers Intel and Advanced Micro Devices Inc.

Amid signs of an improving economy, networking powerhouse Cisco Systems this week said it would pay $2.9 billion for a Massachusetts manufacturer of gear for wireless carriers, Cisco’s second multibillion-dollar acquisition this month.

The Nasdaq stock exchange, loaded with technology companies, has risen 38% this year.

On Thursday, Google shares shot up more than 3%, or $17, to $547, in after-hours trading, surpassing the 52-week high it had reached earlier in the day. In regular trading, Google’s stock fell $5.41 to $529.91. The earnings report came after the market closed.

For Google, the number of paid clicks -- that is, how often shoppers clicked on online ads -- jumped 14% from the third quarter of last year, a sign that consumers may be increasingly logging on to search for bargains.

Similarly, Google’s results may also indicate that wary companies are beginning to increase their advertising budgets again.

But their first stop may be the Web, where electronic tools allow them to closely monitor the cost-effectiveness of their campaigns.

“Search is well-positioned in a poor economy,” said David Hallerman, an analyst with eMarketer, an Internet research firm. “There are a lot of companies that haven’t gone out of business. They still need to get customers.”

Patrick Pichette, Google’s chief financial officer, also said that in an economic downturn, marketers may funnel more dollars to online advertising, which can be more targeted.

“Any smart advertiser will want to max this category before they go to the next one in the recovery,” he said. “They can go to their bosses and say, ‘We got a return on this investment.’ ”

In another indicator that could bode well for market growth, Google also announced a spike in the number of searches performed on mobile phones -- up 30% over the last quarter.

As more phones begin to carry Google’s Android operating system, the company wants to capture a bigger piece of the growing mobile search market, where consumer searches more often lead to a purchase.

“Search on a mobile phone is much more commercial than a computer search,” said John Aiken, an analyst with Majestic Research. “You’re generally looking for a restaurant, or a movie theater or a laundromat.”

As part of its plan to ramp up spending and investment, Google said it had resumed hiring of engineers and sales staff. The company pared its payroll in the previous quarter, something it has rarely done.

Google’s revenue beat analyst expectations. It rose 7% to $5.94 billion from $5.54 billion during the same period last year.

The company earned $5.13 a share compared with $4.06 a year earlier.

IBM’s profits surged 14%, but sales fell 7%, leading the company’s stock to drop nearly 4% in after-hours trading.

IBM said earnings for 2009 should be at least $9.85 a share, above analysts’ expectations.

AMD shares also dropped about 4% in after-market trading, as revenue slipped 22%. But operating income swung to a $76-million profit, after a loss of $72 million in the previous quarter.

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