SAN FRANCISCO — Google Inc. on Thursday passed the first major test of how its Web search advertising business would perform in an economic downturn.
The company delivered solid financial results after weeks of speculation about its first-quarter prospects eroded investor confidence and erased tens of billions in market value.
Google's better-than-expected results marked a rebound from the fourth quarter, when the Mountain View, Calif.-based company fell short of Wall Street's expectations for only the second time. They also could bode well for the online advertising sector, for which it is a bellwether.
"We looked very carefully: Have we been affected by this alleged downturn?" Google Chief Executive Eric Schmidt said in an interview. "No, we have not."
Google's shares soared 17% to $526 in after-hours trading, after slipping $5.49, or 1%, to $449.54. They had fallen 35% this year.
Google earned $1.31 billion, or $4.12 a share, a 30% increase from net income of $1 billion, or $3.18, a year earlier. First-quarter revenue totaled $5.19 billion, up 42% from $3.66 billion a year earlier. Excluding payments to advertising partners, Google raked in $3.7 billion in revenue, about $100 million more than analysts estimated.
"It's a very good sign that people can have confidence in online advertising and in Google even in very difficult conditions," Sanford C. Bernstein analyst Jeffrey Lindsay said.
Research firms reported slowing growth in the number of times consumers click on ads that appear with Google's Web search results and on partner sites. Google says it's showing fewer but more relevant ads.
Many analysts still harbor concerns that the slowdown in paid clicks signals that Google might no longer deliver the kind of results that dazzled investors in years past. They had lowered their expectations ahead of Thursday's report.
Even if Google has not put to rest investors' concerns about slowing growth, particularly in the more mature U.S. advertising market, it certainly diminished them.
"There was this euphoria over the fact that investors have a stock in this kind of environment that they can count on to be a steady Eddie," said Anthony Valencia, media analyst for TCW Group in Los Angeles, which owned 1.69 million Google shares as of Dec. 31.
Schmidt said the quarter marked an important shift: Google earned more revenue abroad than in the U.S., in part because of the weak dollar. "We're just ecstatic over that. The world is a big place and we have worked very hard on this."
Google also hopes it can expand its online empire from small text ads to larger display advertisements and become a one-stop shop with the $3.24-billion purchase of online ad services company DoubleClick Inc., which it closed in the first quarter.
Jonathan Rosenberg, Google senior vice president for product management, said DoubleClick positions it "to become the world's largest display ads provider."
That ambition to dominate the kind of brand advertising favored by corporate marketers raises the competition with Yahoo Inc., the target of an unsolicited takeover attempt by Microsoft Corp. Yahoo is pressuring Microsoft to raise its price or walk away by testing Google ads instead of its own alongside a small percentage of its Web search results.
Schmidt declined to comment on the performance of the two-week test or on the possibility that the two companies might form a broader pact.
"We are very happy to be doing the test," he said. "We've always wanted to do business with Yahoo in some form."
Microsoft has set a deadline of April 26 for Yahoo to accept its offer or face a proxy fight for control of the company. Even if Yahoo and Microsoft come to terms, the pairing would face months of difficult regulatory scrutiny and even tougher integration challenges, distracting both companies at a time when Google is blazing trails.
"Google is probably going to be the real winner here," said Jeff Donlon, senior analyst with Manning & Napier Advisors Inc., which owned 246,000 Google shares as of Dec. 31.