Google Impresses Investors as Ads Push Profit Up 500%

SAN FRANCISCO —  More clicks translated into more bucks for Google Inc., which on Thursday reported that first-quarter profit grew nearly 500% over last year.

Hot demand for online advertising helped Google, which makes money each time someone clicks on the text ads that appear with its search results, nearly double its revenue to $1.26 billion from $651.6 million a year earlier. Google reported net income of $369 million, or $1.29 a share, compared with $64 million, or 24 cents, during the same period last year.

The search giant also appears close to expanding into new forms of advertising: Company co-founder Larry Page said Thursday that Google planned more widespread use of graphical ads, which could diversify its revenue stream and help the company better compete with the display ads shown by rivals.

Google, based in Mountain View, Calif., has been engaged in a heated battle with Yahoo Inc. and Microsoft Corp. In recent months, the three companies have released a flurry of new products designed to develop loyalty among users and provide more ways for advertisers to reach them.

Although Google does not issue profit predictions, analysts started increasing their forecasts after Yahoo reported strong earnings Tuesday.

Nevertheless, the company’s earnings report -- which was released right after the market closed for the day -- far exceeded even the most optimistic expectations: Google shares gained $6.12 to $204.22 on Nasdaq and climbed 9% to $223 in after-hours trading.

“There was very little -- if anything -- to say [that] was disappointing or not up to expectations about the quarter,” said Scott Kessler, Internet equity analyst with Standard & Poor’s Corp.

An accounting decision -- to use “accelerated amortization” rather than “straight-line amortization” for employee stock options -- that Google made before its initial public offering last year contributed to the dramatic profit surge, according to analysts and filings with regulators. That made net income appear stronger compared with prior results.

But no matter how you measure them, analysts said, Google’s results were stellar.

“They basically made a mockery of our numbers and Street expectations,” said Derek Brown, a senior analyst at Pacific Growth Equities. “It was an extraordinary quarter.”

Google lets companies bid to have their text ads shown alongside search-engine results when people type in keywords. Google also places “contextual ads” with news stories, on weblogs and on websites operated by its partners.

Google brought in $657 million, or 52% of its revenue, through ads on its own stable of websites, and $584 million, or 47% of its revenue, through text ads it places on America Online Inc.’s search engine and other partners’ websites.

Text ads generate 99% of Google’s revenue, which has left it especially susceptible if a slowdown in paid search occurs.

The company has quietly experimented with graphical ads on a few partners’ websites.

In response to an analyst’s question during a conference call, Page said the company planned to distribute them more widely.

“You’ll see us roll those out in much greater force over our content network,” he said. “I’m very excited about the opportunities there.”

In an interview, Chief Executive Eric Schmidt said the company was still talking with partners about how quickly to increase the use of graphical ads, and discussing internally whether to include them on its own websites.

But Schmidt said Google’s interest in such ads was not driven by an effort to lessen its reliance on paid search.

“We don’t think in terms of revenue diversification,” he said. “We think, ‘What is the end-user problem we can fix?’ ”