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Google Search, Ads Create $5.70 Billion In Revenue

CEO Eric Schmidt hinted that future search innovation would include semantic technology, which has been hyped for several years now but has yet to really arrive.

Google shares rose Thursday in anticipation of strong fourth-quarter results for the company, and continued to rise in after-hours trading following the company's solid report.

The search company Thursday reported fourth-quarter 2008 revenue of $5.70 billion, an 18% increase compared with its fourth quarter in 2007 and a 3% increase over the $5.54 billion the company reported for its third quarter of 2008.

"Google performed well in the fourth quarter, despite an increasingly difficult economic environment. Search query growth was strong, revenues were up in most verticals, and we successfully contained costs," Google CEO Eric Schmidt said in a statement. "It's unclear how long the global downturn will last, but our focus remains on the long term, and we'll continue to invest in Google's core search and ads business as well as in strategic growth areas such as display, mobile, and enterprise."

Google's strong performance was anticipated by Chicago-based AdGooroo, which said earlier this month that it expected the search company to have its strongest quarter ever. It based this prediction on data indicating 58% growth in the average number of ads Google showed on the first search results page per keyword (4.01 in 4Q vs. 2.54 in 3Q).

According to Thomson Reuters, analysts had been expecting earnings in the range of $4.95 per share; Google delivered $5.10 per share.

In a conference call for investors, Schmidt reiterated Google's commitment to cost controls. "We had tight control on cost, something that had eluded us in the past," he said.

The company's operating expenses declined two percentage points, from 31% in the third quarter to 29% in the fourth. The company added a total of only 99 employees to its workforce during the quarter. Compare that to the first quarter of 2008, when Google added 2,351 employees, about 1,500 of whom were associated with DoubleClick.

Google's newfound thrift should continue to shape the company's balance sheet in coming quarters. Earlier this month, Google said it would shut down six services, layoff 100 recruiters, and close offices in Austin, Texas; Trondheim, Norway; and Lulea, Sweden.

In an effort to retain current employees, Google is offering a stock option exchange program. Schmidt explained that 85% of current employees had stock options that were underwater, meaning those options cost more to exercise than the stock is currently worth. CFO Patrick Pichette said the program will cost the company $460 million as additional stock-based compensation.

Nonetheless, Schmidt expressed optimism. "Business is quite healthy, especially given the economic climate," he said.

Schmidt hinted that future search innovation would include semantic technology, which has been hyped for several years now but has yet to really arrive. "Wouldn't it be nice if Google understood the meaning of your phrase?" he asked, adding that the company plans to introduce technology to make that possible in the months ahead.

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