Google sagging stock soars after strong 1Q showing

If it can meet or exceed analyst expectations like Google did, Yahoo will be in a better position to ward off Microsoft Corp.'s unsolicited takeover bid or at least argue for its suitor to raise the cash-and-stock offer from its current value of about $42 billion.

Google is trying to help Sunnyvale-based Yahoo thwart Microsoft by helping Yahoo place ads on its Web site as part of a test scheduled to conclude next week. Schmidt declined to answer a question about the chances of Google signing a long-term advertising contract with Yahoo a deal that would likely face intense scrutiny from antitrust regulators.

"It's nice to be working with Yahoo," Schmidt said. "We like them very much."

Investors had serious doubts about Google's short-term prospects before Thursday.

The financial targets that guide Wall Street's expectations had fallen during the past two months as Web surfing data convinced analysts that Google's advertising links aren't attracting as much consumer interest amid mounting evidence the U.S. economy had tumbled into a recession. Google makes money from the links only when Web surfers click on them.

But management has said the slowdown in ad clicking largely reflected changes that purposefully reduced the volume of commercial links in an effort to deliver more compelling messages that lead to purchases.

By making this switch, Google bet that advertisers would be willing to pay more for each ad link and ultimately generate more revenue from fewer clicks an approach that appeared to start paying off in the first quarter.