Google has a gangbuster of a quarter

Internet giant Google quieted its critics with an earnings report that showed little sign of an advertising decline, despite outside reports to the contrary.

Google said profits rose 31 percent in the first quarter on 42 percent revenue growth. The company reported revenue of $5.19 billion and profits of $1.3 billion.

"We're very pleased with the quarter," Google CEO Eric Schmidt said on a conference call with analysts. "We're well-positioned for 2008 and beyond, regardless of the business environment we find ourselves in."

Google disappointed investors after its fourth quarter, when it reported results that didn't match Wall Street's expectations.

Since then, prominent market-tracking firm ComScore has put out reports saying that growth in click-throughs on Google's trademark Internet search ads is declining, spooking investors. Google only gets paid when a Web user clicks on one of the countless little ads that show up near Internet search results.

But Google said so-called "paid clicks" grew 20 percent in the first quarter over the same year-ago quarter, and 4 percent over 2007's fourth quarter.

"Paid click growth is much higher than has been speculated upon," Schmidt said.

Greg Sterling, an analyst with Sterling Market Intelligence, says Google's results shows that investors' fears "were somewhat unfounded. Google's growth was not as spectacular as it would have been in a spectacular economy, but it's still the biggest quarter they've ever had."

Paid click growth "is" slowing, but not as greatly as investors had feared, says Gene Munster, an analyst with Piper Jaffray.

Paid click growth fell to 20 percent this quarter, from 30 percent in the fourth quarter and 45 percent in the third quarter. But it doesn't matter, Munster says, because Google now earns more per click.

"The law of averages make it hard to continue growing like Google once was," he says.

Google now commands a mighty 59.8 percent share of Internet searches, to 21.3 percent for rival Yahoo and 9.4 percent for Microsoft, according to ComScore.

Microsoft is seeking a solution to its declining share by making a hostile takeover bid for Yahoo. Yahoo, in trying to keep Microsoft away, is exploring other options and is in the midst of a two-week experiment to outsource search advertising to Google.

Google currently provides ads for 3 percent of Yahoo's search results. Sterling says that if Yahoo and Google went all the way with the relationship, it would add $1 billion to Yahoo's bottom line.

Asked about the prospect of Google fully taking over Yahoo's search ad program, Schmidt said, "We're very excited to be participating in the test. It's not appropriate to speculate beyond that."

Investors were thrilled with Google's results, pushing Google's stock up 17 percent in after-hours trading to $525.96.