April 19 (Bloomberg) -- Google Inc., owner of the most-used Internet search engine, said first-quarter profit rose 69 percent as it increased advertising sales worldwide and took more market share from Yahoo! Inc.

Net income climbed to $1 billion, or $3.18 a share, from $592.3 million, or $1.95 a share, a year earlier, Google said today in a statement. Profit excluding costs for stock options was $3.68 a share, exceeding the average estimate of 27 analysts surveyed by Bloomberg. Google shares rose 3.1 percent in trading after the earnings report.

Sales excluding revenue passed on to partners advanced 66 percent to $2.53 billion, more than analysts predicted, as Google beat rivals Yahoo and Microsoft Corp. in the U.S. and expanded in markets abroad. The gain helped to more than offset a 62 percent increase in expenses as Google spent more on new projects.

``The business is insanely profitable, much more profitable than people guessed,'' said Frank Husic, who manages $600 million at Husic Capital Management in San Francisco. ``They're probably going to solidify their role for a while as the outstanding Internet play.''

Analysts on average had estimated profit minus some costs at $3.28, and sales at $2.5 billion, according to a Bloomberg poll.

Shares of Google gained $14.49 to $486.14 in extended trading. They had fallen $4.36 to $471.65 at 4 p.m. in Nasdaq Stock Market trading and have gained 2.4 percent this year.

Spending Concerns

Investors raised concern before the report that rising expenses might hinder Google's long-term growth. Google spent more to buy computers and promote new services such as Checkout, which offers free online payment processing to merchants.

Capital spending rose 73 percent to $597 million in the quarter. The company paid $1.65 billion for the YouTube video- sharing site, and the $3.1 billion DoubleClick Inc. purchase, announced last week, is its biggest ever. Google said it will continue to make ``significant'' capital expenditures this year.

``We overspend relative to what people think we should on capital,'' Chief Executive Officer Eric Schmidt said in an interview. ``We probably underspend on people in, say, customer service because we're more automated.''

The company added 1,564 employees in the quarter for a total workforce of 12,238 at the end of March.

Google today said Schmidt was named chairman of the board, a new position for the company. He already had been chairman of its executive committee.

Profit margins held up in the quarter, expanding to 63.5 percent from 62.1 percent in the fourth quarter, Credit Suisse analyst Heath Terry said in a note to clients.

Track Record

``The costs were less than I expected,'' said Darren Chervitz, director of research at Jacob Asset Management in New York, which owns about 12,000 Google shares. ``Clearly people were holding their breath.''

Google has beaten analysts' profit estimates in all but one of its 11 quarters as a public company. The company maintained a policy of not forecasting earnings, a practice it says is designed to prevent managing earnings to analysts' estimates.

Sales growth from Google's own Web sites outpaced gains on partners' sites. Ad revenue from Google Web sites rose 76 percent to $2.28 billion, while ad sales on other sites rose 45 percent to $1.35 billion.

Google said improvements to its advertising software spurred sales gains. The company added features including one that lets companies assess the quality of their ads, Senior Vice President Jonathan Rosenberg said on a conference call.

The company handled 48 percent of U.S. search queries in the first quarter, up from 42 percent a year earlier, according to market research firm ComScore Inc. Yahoo was unchanged at 28 percent and Microsoft fell to 11 percent from 13 percent, Reston, Virginia-based ComScore said.

Yahoo Competition

Revenue from outside the U.S. rose to $1.71 billion, or 47 percent of total sales, compared with 42 percent a year earlier, the company said.

Google's results come after Yahoo, owner of the most-visited U.S. Web site and No. 2 in Internet search, this week reported that profit fell 11 percent to $142 million and net sales rose 9 percent to $1.18 billion.

Yahoo disappointed investors that had expected a bigger gain from a new advertising program called Project Panama. Analysts including Citigroup Inc.'s Mark Mahaney said the program probably didn't take ad spending away from Google.

To bolster growth, Google is tapping new markets outside of the text-links that appear next to search results. In February, it started selling e-mail, calendar and personalized home page services to businesses over the Web. This month, the company struck an agreement to sell ads on EchoStar Communications Corp.'s satellite television service and U.S. radio stations run by Clear Channel Communications Inc.

Schmidt said today that revenue from television or radio advertising may become material in 2008.

``If I were to estimate, I would say 08 not 07,'' Schmidt said. ``But we don't really know.''

In April last year, Google reported first-quarter profit that beat the most optimistic of analysts' estimates, sparking a 5.3 percent jump in the stock the next day.

To contact the reporter on this story: Jonathan Thaw in San Francisco at jthaw@bloomberg.net.

Last Updated: April 19, 2007 20:00 EDT