• by Laurie Sullivan  @lauriesullivan, January 22, 2009

Google said Thursday the Web search market remained strong in the fourth quarter, helping the company post better-than-expected earnings and stronger click rates. But even though Google's operating profit rose sharply, the Internet giant posted the company's first decline in net profit.

Google reported that aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of its AdSense partners, rose 18% over the fourth quarter of 2007.

Partner sites generated revenue--through AdSense programs--of $1.69 billion, or 30% of total revenue, in the quarter. This represents a 4% increase over fourth-quarter 2007 network revenues of $1.64 billion and a 1% increase over third quarter 2008 network revenues of $1.68 billion.

Mountain View, Calif.-based Google's core focus remains the "huge untapped potential" of search and ads, said Eric Schmidt, Google CEO, during a call with investors and analysts. "Search, more dynamic, less static, empowers peoples' use," he said. "SearchWiki is a current example where people can annotate search quality and tell us how to make the search better."

Schmidt said an enabling technology--which would help the search engine to understand the meaning of a phrase rather than simply the meaning of the individual words--is not far off.

Along with that boot in technology should come a lift in advertising. Spending in the U.S. on ads connected to search should grow 14.9% in 2009 to $12.3 billion, according to research firm eMarketer.

Bringing the science of search into the art of display ads, Google's fourth-quarter revenue rose 18% to $5.70 billion for the quarter end Dec. 31, up from $4.83 billion in the year-ago quarter. Excluding commissions paid to advertising partners, Google had sales of $4.22 billion.

Net income came in at $382 million, or $1.21 per share--compared with $1.21 billion, or $3.79, in the year earlier. That represented a 68% drop from the same quarter in 2007. The company's profit had climbed by about 17% in the previous 17 quarters.

"There are few, if any, businesses able to withstand the global economic forces bringing business levels down, and Google is no exception," said Cantor Fitzgerald Analyst Derek Brown. "The company's pay-per-performance model is likely more recession-resistant than other forms of advertising."

While Google's business is made of billions of clicks worth quarters, nickels, dimes, dollars, Brown said the company has made it clear that it's shedding less productive products, which is consistent with tightening the belt.

Excluding special items, Google said earnings would have been $5.10 per share. Analysts on average estimated Google to report earnings of $4.95 a share for the period ended in December, and $4.1 billion in net revenue, according to Thomson Reuters.

Google-owned sites generated revenue of $3.81 billion, or 67% of total revenue--up 22% from the same quarter in the prior year. Revenue from outside the U.S. reached $2.86 billion, representing 50% of total revenues in the fourth quarter of 2008, compared to 48% in the fourth quarter of 2007.

Web traffic on Google's search engine rose 9% from the prior year, and a three-month average monthly unique audience reached 132.6 million in the quarter, up from 121.9 million in the year-ago quarter, according to Nielsen Online.

The research firm said total minutes spent on Google Web properties rose 35% to 47.7 billion, compared with the same quarter in 2007. The search engine remained the No. 1 search provider in December 2008, with an estimated 5.4 billion search queries, representing 62.9% of all search queries conducted during the month.

YouTube was the number one Web brand when ranked by total streams in December 2008, with 5.6 billion total streams and 84.6 million unique viewers.

Google recently expanded its business beyond ads that appear on its main search engine and into YouTube. The company unveiled a new advertising product on the video-sharing site last quarter, and released new business software and a video conferencing program. It also cut or combined some products. The company nixed Google Notebook, which lets users post content from various sources to one site, and the newspaper ad program that began in 2006.

Schmidt said the company now has tight controls over costs, which eluded it in the past.