Google Nails It

Updated with comments from Google's post-earnings conference call

Google ( GOOG) nailed sales and flew by profit targets in the second quarter and saw some stability in the ad market.

The Internet search shop posted a profit of $5.36 a share, up from the $4.63 in the year-ago quarter and well above the $5.08 net income analysts were looking for, according to First Call.

Sales for the quarter ended last month, excluding $1.45 billion in so-called traffic acquisition costs (TAC), were $4.07 billion, up from the $3.9 billion level a year ago and roughly in line with the $4.06 billion analysts were expecting. "Google had a very good quarter, especially given the continued macro-economic downturn. While most of the world's largest economies shrank, Google's year-over-year revenues were up 3%," CEO Eric Schmidt said in a press release.

Google chief Schmidt said he was seeing some return of life in the search market. "We are not now looking at the downward spiral that we were seeing six months ago," Schmidt told analysts on an earnings call Thursday.

Helping to illustrate the change in the past several months, sales chief Nikesh Arora said small companies continued to buy ads but that large advertisers were more reluctant, and now that has changed.

"Big advertisers seem to have come back to the table after watching and waiting for awhile," Arora said.

The performance signals a return of modest growth after sales and profits hit the skids last year with the economic downturn and the dramatic declines in advertising spending.

But Google saw two huge improvements to help bolster the second-quarter numbers. The company saw its paid click ad revenue jump 15% from year ago levels, though 2% down from the first quarter. And Google's cost-per-click, the measure of how much the company pays its ad partners declined 13%, with an additional 2% drop from the first quarter.

Google has been in a slump, and has given investors at least five reasons to think the stock isn't necessarily going up.

Rivals Yahoo! ( YHOO) and Microsoft ( MSFT) have held firm in the downturn and have introduced new services to pry open Google's grip on the search market.

Google responded with an Internet calling service called Google Voice and the announcement of Chrome a browser based computer operating system to unplugMicrosoft's mobile device software effort.

Google shares were down 2% in afterhours trading as the company's top line number didn't quite dazzle investors looking for a blowout in sales in the quarter.

Google has been criticized for spending an estimated $500 million a year on its YouTube video service, without getting much in return. But company executives defended YouTube and said they were gaining traction on advertising, such as pre-roll ads, in the videos.

The advertising efforts may start to pull the video business out of the red ink, Google executives said.

"YouTube will be profitable for us," Arora said.