Google earnings rise 26%, top analyst forecasts

— -- The struggling economy hasn't caught up with Google goog— yet.

The Web giant, which announced strong earnings results Thursday, knows it's in for a rougher ride in coming quarters.

Google reported profit of $1.35 billion on revenue of $5.54 billion for the third quarter. Revenue was up 31% from a year ago and 3% above the second quarter of 2008. "We're very realistic about the economic climate but optimistic about the future," Google CEO Eric Schmidt said in a conference call with analysts.

Google earned $4.92 a share, after commissions, up from the $4.75 a share expected by analysts polled by Thomson Reuters.

Schmidt called it a "good quarter" at a time when the "economic situation is clearly worse than people were predicting a month ago. What started as a financial crisis is affecting the wider economy. It's clear the situation is so fluid, we're in uncharted territory."

Schmidt said Google is keeping a "tight control" on costs. He said he believes that even in a downturn, advertisers will need Google more than ever to reach customers.

Beyond advertising, Schmidt said Google's "Apps" — online tools for word processing and creating spreadsheets that compete with Microsoft's Office software — can grow as companies look to save money. "We're there for them," Schmidt said.

The tools are free for consumers; businesses pay monthly fees for upgraded versions. Google said it now has over 1 million Apps customers, though it didn't break down paid and free accounts.

Google CFO Hal Covert said that despite tough economic news, Google can profit. "When people are counting their pennies and researching their purchases, we have an upside because people go to Google to search."

In the past quarter, Google has introduced a new Web browser, called Chrome, and several new advertising programs for its YouTube video-sharing subsidiary. Next week a Google branded cellphone, the G1 from T-Mobile, will start shipping.

"In the context of everyone else, they had a good quarter," says independent analyst Greg Sterling of Sterling Market Intelligence. "A lot of people were waiting for Google to come down to earth, but it didn't happen."

However, analyst Trip Chowdhry of Global Equities Research says Google's best days are behind it. He says revenue growth has declined from 121% year over year in 2004 to 56% in 2007, and he doesn't see that changing.

Google's stock, which hit a high of $702 a share at the end of 2007, has fallen to the $350 range, "and I don't see it getting back up to $500 again," Chowdhry says.

He believes Internet users are tiring of search ads, and will click them less. That would hurt Google, since it makes most of its earnings from search advertising. "It's a natural evolution for a mature company," he adds.

However, Chowdhry said Google was able to beat estimates by keeping costs in control.

Investors cheered Google's earnings: Its stock gained 9.9% in after-hours trading to $388.00.