July 21 (Bloomberg) -- Google Inc., the No. 1 Internet search engine, said second-quarter profit rose fourfold as sales of Web advertising surged. The shares fell as sales growth ebbed and the company said the slowdown may continue this quarter.

Net income rose to $342.8 million, or $1.19 a share, from $79.1 million, or 30 cents, a year earlier. Sales almost doubled to $1.38 billion, Mountain View, California-based Google said today in a statement.

Revenue rose 10 percent from the first quarter, the slowest pace since Google went public in August, and profit margins shrank for the first time as the company almost doubled spending. Chief Financial Officer George Reyes told analysts to expect a ``slower quarter'' this period, the first indication that the growth that propelled Google shares fourfold in a year may be tapering.

``We are concerned'' by the lower margin and rising spending, said Laura Martin, an analyst at Soleil Securities Corp. who rates the stock ``hold.'' Those are ``both structural and seasonal issues facing Google in the near term. It's not just a third- quarter negative, it's structural.''

Google stock, which reached a record $317.80 today, fell $19.86 to $294.08 in extended trading. The stock has risen from $85 at its August initial public offering. Yahoo! Inc. shares tumbled 11 percent yesterday and 1.38 percent today.

The shares have surged more than 5 percent on each of the days after the past four earnings reports.

``If you'd asked me when the stock was at $200, I would have probably said the stock wouldn't go higher,'' Chief Executive Officer Eric Schmidt said in an interview. The shares are ``going to go up and down based on expectations. People are making guesses and the guesses can be wrong in any direction.''

No Forecasts

Google, which has a policy against forecasting earnings, told analysts that the second and third quarters are ``difficult'' periods. Reyes cited declining growth in Europe and said third quarter sales last year were abnormally strong because of publicity surrounding the company's IPO.

``You shouldn't just take that growth rate and extrapolate for this year,'' Schmidt said in the interview.

As revenue growth tapers, Google plans to keep spending to expand. The company is opening a research and development facilities in countries including China, increased its workforce by 20 percent last quarter and is adding new features such as maps and better search results. Research and development doubled to $95.8 million and capital spending rose 64 percent to $157.5 million.

Operating margins shrank to 34.4 percent from 35.2 percent in the quarter and may fall further, Reyes said.

Yahoo

Google's comments follow Yahoo, the most-visited Internet site and No. 2 search engine, which on July 19 reported revenue that fell short of analysts' estimates and forecast sales that may also miss expectations. Sunnyvale, California-based Yahoo said revenue, excluding fees paid to other sites, rose 44 percent to $875.1 million, missing estimates of $882.7 million.

Google's revenue excluding fees passed to other Web sites for displaying ads, rose to $890 million, topping the $842.5 million average estimate of 26 analysts surveyed by Thomson Financial.

``Some of the expectations were even higher than the overall performance,'' said Piper Jaffray Co. analyst Safa Rashtchy in Menlo Park, California. ``Operating margins were slightly lower than expectations.''

Sales growth in the quarter reflected more visitors to the search site and the company's ability to wring more money from those Web surfers.

Ads appearing on Google's Web site next to search results accounted for $737 million, or 53 percent of revenue, the company said. Revenue from partner sites was $630 million, or 46 percent of sales.

International revenue accounted for 39 percent of total sales, the same level as in the first quarter.

New Sites

Schmidt, 50, last quarter spent money on new sites such as Internet maps designed to attract visitors and bolster sales of ads linked to search results for local businesses. Search-linked ads generate almost all the company's revenue.

Google's technology that places ads next to search results generates more revenue than competitors by calculating how much was paid for the spot and how many people click on it, Goldman Sachs & Co. analyst Anthony Noto wrote in a July 12 report. He is the top ranked Internet analyst by Institutional Investor magazine.

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

Last Updated: July 21, 2005 19:11 EDT