SAN FRANCISCO -- Investors renewed their love affair with Google ( GOOG) after it handily topped Wall Street estimates in the third quarter and undercut arguments that it would bow to economic pressure. The stock had spent the day in the dumps as investors agonized over whether Google would blow its quarter. But in after-hours trading, shares rocketed 10.5% to $389.91. The Internet giant reported a profit of $1.35 billion, or $4.24 a share, in the third quarter. Excluding certain items, it earned $1.56 billion, or $4.92 a share. That was well above Wall Street's estimates of $4.80 a share. Third-quarter revenue was up 31% to $5.54 billion. Excluding traffic acquisition costs, revenue totaled $4.04 billion, falling shy of analysts' estimates of $4.05 billion. Chief Executive Eric Schmidt made no claims that Google was recession-proof, however. In fact, he opened his remarks on Thursday's conference call with analysts by talking about the economy and the toll it has taken on all companies. "We're all sort of in uncharted territory," he said. At the same time, he said Google will continue to take the long view, making investments where needed. The company showed no signs of letting up on the hiring front, adding 500 more employees in the third quarter to bring its total up to 20,000. Google-owned sites generated revenue of $3.67 billion, or 67% of total revenue, in the third quarter, a 34% increase from a year ago. Google's partner sites generated $1.68 billion, or 30% of total revenue, in the third quarter, a 15% increase from a year ago.
Aggregate paid clicks, which includes clicks related to ads on both Google sites and partner sites, grew 18% in the third quarter vs. a year ago, and 4% sequentially. Traffic acquisition costs, which are the portion of revenue that Google shares with its partners, totaled $1.5 billion in the third quarter, up from $1.47 billion sequentially. Chief Financial Officer Patrick Pichette said the company would see additional pressure on traffic acquisition costs going forward. The concern on Wall Street recently has been that Google would face the same pressure on online advertising spending as rivals like Yahoo! ( YHOO). A number of analysts pointed to advertisers cutting back on their budgets as they braced for further economic turmoil. But Google's chief economist Hal Varian, who joined Thursday's conference call for only the second time, noted that advertisers are loathe to reduce their spending on advertising that actually shows results -- in this case, search ads, where Google makes the vast majority of its revenue. Varian said that in a recessionary environment, Google sees potential upside. "As people shop more carefully, they're going to research what they buy," he said. As for a strengthening dollar that has hurt some Internet companies like eBay ( EBAY), which have a strong presence abroad, Google managed to minimize its exposure through cash flow hedging. About 51% of Google's revenue comes from overseas. But the company put into place a program of foreign exchange options to hedge forecasted revenue over the next 18 months. In the third quarter, it hedged revenue denominated in the euro, the Canadian dollar and the British pound.
As a result, Google realized a $34 million benefit to its international revenue in the third quarter, which totaled $2.85 billion. Nonetheless, the company noted that if foreign currency exchange rates had stayed constant from the second quarter to the third quarter, international revenue would have been $59 million higher. In the U.K., where Google implemented its cash flow hedges late in the quarter, revenue showed some weakness, totaling $776 million and representing 14% of revenue, down from 16% a year ago.