SAN FRANCISCO (AP) -- Google Inc. shook off the economic turbulence to deliver a third-quarter profit that topped analysts' forecasts, supporting the Internet search leader's theory that its advertising system will prosper even in tough times.
The reassuring performance lifted Google shares by more than 10 percent late Thursday, even though the company's executives made some of their most sober remarks yet about the worst financial crisis since the stock market crashed in 1929.
It's been bad enough to prompt Google -- renowned for its free-spending ways -- to hunker down and start scrimping more than it has in the past because the economy has entered "uncharted territory," Chairman Eric Schmidt told analysts in a conference call.
Google navigated through the economic shoals in the third quarter, earning $1.35 billion, or $4.24 per share. The profit rose 26 percent from $1.07 billion, or $3.38 per share, at the same time last year.
Excluding costs for employee stock compensation, Google said it would have made $4.92 per share. That figure surpassed the average estimate of $4.75 per share among analysts polled by Thomson Reuters.
Revenue climbed 31 percent to $5.54 billion. After subtracting advertising commissions, Google's revenue totaled $4.04 billion -- about $20 million below analyst estimates.
Analysts had been decreasing their projections amid waves of investor pessimism that pounded Google's stock price to a three-year low of $309.44 earlier Thursday. The shares subsequently rebounded with the rest of the market to close at $353.02, up $13.85, and then surged by another $36.98, or 10.5 percent, in extended trading after the company released its third-quarter results.
The pleasant surprise helped ease fears that online advertisers will stop pouring as much money into Google in an effort to save money in an economy that appears headed toward its worst recession since the early 1980s.
Google executives have maintained that the company can still thrive because its technology does a better job of finding customers at a lower cost to advertisers than traditional marketing campaigns. Those factors, Google argues, means it could receive an even bigger slice of advertising budgets in a crumbling economy.
What's more, consumers scrambling to make ends meet may be more likely to use the Internet to hunt for bargains -- a quest that could increase the Google search requests that spit out ads.
Schmidt, though, acknowledged that even the Internet's most profitable company is facing a more daunting challenge now than when the third quarter began.
"It is pretty clear the economic situation today globally is worse than people were predicting a month ago," he said during the conference call.
Google co-founder Sergey Brin predicted the company will emerge from the turmoil even stronger. "My favorite time to manage is during a bust," Brin said in a Thursday interview with The Associated Press. "It brings more clarity about what your customers need and what your priorities should be."
Keeping a closer eye on expenses is near the top of Google's to-do list now, Schmidt told analysts, because "it's the right thing to do."
The frugal approach is a change of pace for Google, which takes pride in spending heavily to treat its employees to free meals and expand the capacity of its data centers that run its search engine, e-mail and other products.
While Google plans to continue feeding its employees for free, the company already has shortened the operating hours of some cafes and, in some instances, is offering two entrees instead of three, Brin said. The company also is reducing the number of contractors it uses.
In another indication of a tightening budget, Google's capital expenditures in the third quarter totaled $452 million, an 18 percent decrease from last year.
That's the lowest amount Google has spent on capital expenditures since the fourth quarter of 2006. Chief Financial Officer Patrick Pichette attributed the sharp decline to the company's fluctuating needs for additional computers, and said spending in that area could rise again.
Google clearly is managing its payroll more carefully. the company hired another 519 workers during the quarter, down from an increase of 2,130 employees at the same time last year. The company now has 20,123 employees.
Even as it curbs its costs, Google's bank account is swelling. The company ended September with $14.4 billion in cash, up from $12.7 billion in June.
Google also is vying to become an even more dominant force on the Internet by selling ads on behalf of its slumping rival, Yahoo Inc. The alliance has been delayed by an U.S. Justice Department investigation into whether the partnership would undercut competition in the Internet advertising market. Schmidt said he hopes to resolve the fate of the Yahoo deal soon.
