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Originally published October 19, 2007 at 12:00 AM | Page modified October 19, 2007 at 2:02 AM

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Google keeps getting hotter

Already the Internet search leader, Google picked up more bragging rights Thursday when it surpassed Cisco Systems as Silicon Valley's most...

The Associated Press

SAN FRANCISCO — Already the Internet search leader, Google picked up more bragging rights Thursday when it surpassed Cisco Systems as Silicon Valley's most valuable company.

Microsoft, which started when Google co-founders Larry Page and Sergey Brin were still toddlers, is now the only high-tech company worth more than the Internet search leader.

Google's third-quarter earnings provided another reminder of why the 9-year-old company is such a hot commodity.

In the latest on a long list of pleasant surprises, Google's profit soared 46 percent to surpass the high expectations that had elevated its stock price by more than $100 in the past month.

As it has been for years, Google reaped the benefits of running the Internet's most popular advertising network as more marketing dollars shift to the Web from television, radio, newspapers and magazines.

"We're strong and getting stronger," Google Chairman Eric Schmidt said Thursday. "What I am most pleased about is our model works."

Chris Winfield, who runs the search- engine ad firm 10e20, says Google has become the Internet's equivalent of the Beatles during that rock group's heyday in the 1960s. "It's pretty amazing, it's almost like they are in control of the world."

Overcoming a traditionally slow season for Web surfing, Google said Thursday that it earned $1.07 billion, or $3.38 per share, for the three months ended in September. That was up from net income of $733.4 million, or $2.36 per share, at the same time last year.

If not for the cost of awarding stock to its steadily expanding work force, Google said it would have earned $3.91 per share. That topped the average estimate of $3.78 per share among analysts.

Revenue for the period totaled $4.23 billion, a 57 percent increase from $2.69 billion last year.

After subtracting commissions paid to its thousands of advertising partners, Google's revenue stood at $3.01 billion — about $70 million above the average analyst estimate.

The performance represented a return to form for Google after its second-quarter earnings disappointed Wall Street. The company has surpassed analyst estimates in all but two of the 13 quarters since its August 2004 initial public offering.

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Wall Street already had been counting on a stellar quarter from Google, especially after its smaller rival, Yahoo, beat analyst expectations with its third-quarter earnings released earlier this week.

Google shares added $6.14 Thursday to finish the regular session at $639.62, leaving it with a market value of just below $200 billion to eclipse its Silicon Valley neighbor Cisco.

Google's stock seems likely to reach new heights today after gaining an additional $3.88 in Thursday's after-hours trading.

Although it relies on complex technology, Google's business formula is fairly simple. As it processes a search request, Google also scans its database for text-based ads related to the same topic as the query and displays the commercial messages along the side and top of the results page.

Google gets paid when someone clicks on an ad on its pages or one of its partners' sites.

There's ample opportunity to display ads, with Google fielding about 1.2 billion search requests worldwide per day, based on the latest data from comScore. That's more than quadruple the number of requests handled by Yahoo, which runs the second largest search engine.

"The Google machine continues to run pretty smoothly," said Cantor Fitzgerald analyst Derek Brown.

While becoming even more dominant in search, Google also is branching in new directions that are creating new ways to sell ads and opening up potential new revenue channels in the software-applications market.

In the past few months, Google unveiled a way to show text-based ads across the bottom of videos supplied by its YouTube subsidiary and also began distributing ads within "widgets" — the interactive capsules that are becoming Internet staples.

"Each of these initiatives give advertisers new and interesting ways to build relationships with customers," Schmidt told analysts during a conference call.

In a sign of its ambitious expansion plans, Google added 2,130 employees in the third quarter — more than in any three-month period in its history. Management said the summer additions included about 1,000 hires right out of college and 300 employees inherited in its $625 million acquisition of e-mail specialist Postini Inc.

Schmidt assured analysts that Google is closely monitoring the size of its work force and indicated the hiring will be more modest in the current quarter.

As of Sept. 30, the company's payroll totaled 15,916 people, including hundreds who have become millionaires because Google's stock has increased by more than sevenfold from its IPO price.

Copyright © 2007 The Seattle Times Company

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