By Yi-Wyn Yen

Google’s shares have lost a third of their value since the start of the year, and concern is growing whether the small text ads Google serves are partly to blame. That will be one of the top things Wall Street will pay attention to when Google (GOOG) reports earnings Thursday after the close of trading.

“Revenue growth and paid clicks. That is what is on everyone’s minds,” says Imran Khan, an Internet analyst with J.P. Morgan.

In late February, comScore released a controversial report that had many analysts convinced that Google was not immune to a recession. The comScore report suggested that Internet users in the United States were clicking on Google ads less frequently. Some analysts began slashing their price target on Google, which gets 97% of its revenues from online ads, after the report showed that Google’s ‘paid clicks’ were flat in both January and February from the same period a year ago.

Tuesday evening comScore issued its latest report that showed Google’s paid clicks grew 3% in March year-over-year. But this time, analysts remain more cautious of the comScore’s numbers and warned investors against reading too much into the data. “We…believe that it is most useful for spotting trends,” wrote UBS analyst Ben Schachter in a report.

Is the slowing growth of Google’s paid clicks due to a weaker economy or because the company is actively managing the volume of its own ads? Google, which does not give forecasts for future performance, has said it is the latter and it is working on weeding out the poor quality clicks.

If that is the case, Google will still have to prove that its quality control initiatives translated into higher-revenue growth for the first quarter. Google believes that by placing fewer ads, it will be able to charge higher rates per ad.

Schachter is skeptical that the revenue generated by fewer, higher-quality ads will make up the difference. “Google may have made some pricing improvements, but we don’t believe they will be enough,” he wrote.

“We simply disagree with the notion that pricing out the lower quality advertisers will somehow result in higher quality advertisers paying higher rates in the near-term,” he added.

Besides paid click revenue, there will be plenty of other topics to discuss about Google’s first quarter. In an effort to push for open standards among mobile operators, Google entered the 700 MHz spectrum auction. In the second half of the year, Taiwanese manufacturer HTC is set to release a handset that uses Android, Google’s own mobile operating system.

The search giant also closed its $3.1 billion acquisition of DoubleClick, the industry’s top ad server. Analysts will also pay particularly close attention to Google’s integration plans for DoubleClick. In April, Google laid off a quarter of DoubleClick’s 1,200 U.S. employees.

The DoubleClick deal is largely seen as a way for Google to grow its display advertising potential. Wrote Citi analyst Mark Mahaney, “We believe that traction with the DoubleClick deal – along with mobile Internet and YouTube monetization progress – can provide material stock catalysts” for the second half of 2008 and first half of 2009.

By Scott Moritz

Google (GOOG) is sitting squarely in a troubling three-month slowing trend, and only some deft moves can spare the search giant from an apparent first-quarter shortfall.

ComScore numbers once again confirmed that people are searching less and clicking on advertisements at a much slower rate as the economy tanks and consumer spending pulls back. In March, Google’s paid clicks grew 2.7% over year-ago levels putting first-quarter paid click growth at 1.8%, a big slowdown from the 25% rate in the previous quarter and well below the 48% pace in the third quarter.

When your revenue engine is almost entirely fueled by Internet searches and ads clicks, it’s probably wise to watch your gauges. Analysts’ estimates for Google’s first quarter have been cut sharply ever since this trend was first spotted in January. But Google fans say the company has been honing its search efficiency and raising prices to offset the slump.

Additionally, some analyst point to Google’s ability to increase its U.S. market share to 55% in March from 53% at the beginning of the year.

Google reports earnings after the market closes Thursday. Analysts are looking for adjusted earnings of $4.52 a share on sales of $3.61 billion in the first quarter ended last month. That calls for a top line growth rate of 42% over last year’s revenue level.

If the company made adjustments, the chances of disappointing Wall Street will be limited. But if ComScore’s numbers are any indication, writes Henry Blodget of Silicon Alley Insider, Google “will miss by a mile.”

By Scott Moritz and Michal Lev-Ram

A solid performance from Nokia (NOK) could be the prescription to elevate the warning-weary mood in the tech sector.

The No.1 mobile phone maker is due to report first-quarter results early Thursday, kicking off the hotly anticipated wireless industry earnings parade. Among the players are No.3 phone shop Motorola (MOT), Verizon Wireless (VZ), Apple (AAPL), AT&T (T) and Sprint (S).

Unlike the worries surrounding other big tech names like Cisco and Google, Nokia’s global reach and the booming worldwide demand for wireless devices gives analysts and investors a bit of confidence that the big Finnish phone titan will hit its targets.

“People are nervous about it but I don’t foresee a big variance” from Wall Street estimates, says one analyst, who asked not to be named.

Here are some of the key numbers to look for on the score sheet. Analysts’ consensus estimates call for Nokia to have sold about 115.5 million phones, booking an adjusted profit of 57 cents (36 Euro cents) on $20 billion (12.7 billion Euros) in sales for the quarter ended last month.

Nokia usually doesn’t provide detailed financial forecasts, but there will probably be some lively discussion about the immediate and the long-range business outlook.

“Nokia may reiterate the market growth rate of 10% and its intentions to grow faster than the market as it makes a bigger push into the U.S.,” writes RBC analyst Mark Sue in a preview report Tuesday. “Near term, Nokia is enjoying rapid growth in Africa, strong trends in India and China, and inline contributions from Europe,” Sue continued.

Nokia had 38% of the world’s cell phone market at the end of last year and it edges closer every day to a 40% slice of that sweet cake.

While mighty Nokia isn’t completely immune to economic downturns, it has a secret weapon that other phone makers don’t: a dominant presence in faster-growing developing markets.

Last year, 56% of Nokia’s net sales came from Asia, Latin America, the Middle East and Africa, while Europe and the U.S. accounted for 39% and 5%, respectively. This quarter, that gap will probably widen even more, with the volume of handsets sold in developing regions growing at a much faster pace than in more mature markets.

Nokia’s limited exposure to the U.S. reduces near-term risks and offers an opportunity for share gains through 2008, Oppenheimer analyst Ittai Kidron said in a recent report. “Its strong position in the low end and emerging markets, the market’s strongest growth regions, offers upside,” says Kidron.

To help retain its “strong position,” Nokia has developed a wide range of inexpensive phones for countries like India, where millions of people buy their first handset each month. Earlier this month the company came out with four new entry-level devices, including the Nokia 1680 “classic” — its cheapest cameraphone yet at about $80. The company hopes that, as consumers in these countries upgrade, they’ll keep buying Nokia.

That doesn’t mean that Europe and the United States – where there’s more of an appetite for pricey multimedia devices with large profit margins – aren’t important markets for Nokia. While Nokia sells a much higher volume of phones in emerging markets, Europe is still its single most profit- and revenue-generating region.

Some analysts worry that Nokia’s NSeries of multimedia devices is stale, and the company is long overdue to introduce an iPhone competitor. Rivals LG, Samsung and Sony Ericsson all unveiled touchscreen phones at the CTIA wireless trade show earlier this month.

One thing’s for sure – it will take a lot of cheap handsets to make up for slowing growth on the mid- and high-end market.

And that just the solid act people are looking for.

“I think we will see that the macro economic slowdown didn’t cause them to miss,” says one money manager who holds Nokia stock. “And bottom line, Nokia will show that it’s still the dominant force in handsets.”

By Michal Lev-Ram

Intel announced first-quarter sales and full-year guidance that beat Wall Street estimates after the market close on Tuesday, sending shares up more than 8% in after-hours trading.

Intel’s (INTC) sales came in at $9.7 billion, above the $9.63 billion analysts had expected and up 9% compared to its year-ago quarter.

The chipmaker also reported earnings of 25 cents per share, in line with analysts’ projections but below the 27 cents per share the company earned in the same period a year ago.

“Our first quarter results demonstrate a strengthening core business and a solid global market environment,” said Paul Otellini, chief executive of Intel in a written statement. “We saw healthy demand for our leading-edge processors and chipsets across all segments.”

Intel’s second-quarter outlook was upbeat as well. The company raised its forecast for the quarter, saying it is projecting sales of $9 billion to $9.6 billion, compared with current estimates of $9.2 billion. It also said it anticipates slightly better-than-expected profit margins for the current quarter and full year.

But it’s been a bumpy few months for the Santa Clara, Calif.-based semiconductor giant. The company lowered its sales targets for the first quarter in January. Last month, it reduced its first-quarter gross margin forecast to 54% — compared to a previous forecast of 56%. According to today’s first-quarter results, gross margins came in at 53.8%.

Gross margins, which measure how much money a company makes after subtracting cost of sales, is a key profitability metric in the chip industry that is looked at closely by analysts. Intel cited lower than expected prices for the type of flash memory chips used in digital cameras and MP3 players last month as the reason margins would be lower than it first anticipated.

On Tuesday the company said that strength in its microprocessor business — the type of chips used in PCs and servers — will help offset the decline in memory prices.

Rival Advanced Micro Devices (AMD) has also been challenged due to worries that a slowdown in economic spending is weakening PC demand. AMD recently said first-quarter sales would be well below expectations, and that it would cut about 10% of its staff, or 1,600 jobs. AMD will report its first-quarter results on Thursday.

By Scott Martin

Novatel’s big miss (NVTL) offers a glimpse of how slumping tech spending can pinch a weak player.

The wireless modem maker warned Monday that first-quarter sales came in below its target. Revenue was $91 million, or 9% below its previous forecast. Novatel will release its disclose its full earnings for the quarter on May 1.

Novatel blamed a product glitch for delays in its supplies of USB devices to a European customer, in a press release Monday after the market closed. But it became clear on a conference call with analyst that other factors weighed heavily on the San Diego tech shop. Among the problems in the quarter ended March 31 was the continued collapse of Sprint (S), a big buyer of so-called 3G modems. The company also saw sluggish demand from another key customer Dell (DELL), which has seen its own share of struggles in the PC market.

Novatel’s product stumble, combined with weakening customers, left the door open for a third condition familiar to players in a cutthroat market beset by slowing orders — losing business to a rival. In this case, wireless modem giant Sierra Wireless (SWIR) swept up business that Novatel expected to book. Novatel shares fell 21% Tuesday in the wake of the warning.

The triple treat was too much for Novatel’s board. The company also announced that Peter Leparulo, the company’s chairman and former chief, would take over immediately as CEO from Brad Weinert, who will continue as president.

“Everyone around this table agrees that better execution is required for this unforgiving market, where carriers are looking to maintain leaner inventories,” Leparulo told analysts on a conference call Monday.

Brace for a rough ride, he seems to be saying, which is something tech investors and analysts fear they will be hearing a lot this earnings season.

By Yi-Wyn Yen

Tick tock.

One week has passed since Microsoft CEO Steve Ballmer set a three-week deadline for Yahoo to accept the software giant’s $42 billion offer, yet the companies are no closer to reaching an agreement than they were last Saturday.

Should they fail to reach an agreement by April 26, Ballmer will mount a proxy fight to oust Yahoo’s board of directors. But before things get truly hostile, Microsoft (MSFT), will find ways tighten the screws on Yahoo (YHOO).

Analysts speculate that the most likely scenario is for executives from both parties to meet again for the first time since the letter went public and strike a deal.

While the software giant is debating bringing News Corp. (NWS) on as a bidding partner to buy Yahoo, the complexities of engaging three parties and reaching an agreement swiftly make that scenario unlikely. Despite all the numerous wheeling and dealing among Internet giants, “We still think Microsoft will prevail,” wrote UBS analysts Ben Schachter and Heather Bellini in a note to clients.

Yahoo, however, isn’t going down without a fight. The company publicly rejected Redmond’s initial offer to buy out the company at $31 a share because it is convinced the bid is too low. The shares are now valued at $29. In an effort to find white knights, Yahoo has sought a three-way alliance with Time Warner (TWX) (which owns Fortune and CNNMoney) and Google this week. Time Warner would offer cash and fold AOL into Yahoo in exchange for a stake. Yahoo meanwhile is testing Google’s search ad service.

Such an alliance is shaky at best. A Yahoo-Google combination may face regulatory problems. And Yahoo’s shareholders may not find a Yahoo-AOL deal nearly as attractive as a Microsoft-Yahoo offer.

Industry watchers believe that Yahoo’s latest efforts are pure posturing. “They are setting up a textbook case to attract a higher price from Microsoft. It’s a classic diversionary tactic,” says James Owers, a professor of corporate finance at Robinson College of Business at Georgia State. “They were probably very unhappy with Ballmer’s letter and raced off to have discussions with AOL. It’s an attempt to say, ‘Hey, don’t bully us and threaten us with a lower price.’ “

Microsoft could attempt to walk away from the bid in an effort to make Yahoo’s shares drop dramatically. Oracle CEO Larry Ellison employed a similar tactic when he pursued PeopleSoft. Yahoo’s stock has traded 51% higher on average than when it last traded at $19.18 prior to Microsoft’s offer. Microsoft is offering a bid that’s worth a 62% premium of Yahoo’s shares. But a scenario to arm-twist Yahoo could backfire. “It’s the most aggressive move to walk away and come back with a lower bid. That would get the egos on the Yahoo side pretty enraged,” Owers says.

Ballmer is determined to buy Yahoo, and most likely, will get what he wants even if he ultimately pays a little bit more. Some Wall Street analysts expect Microsoft to offer Yahoo between $32 and $35 a share. Ballmer has been vocal about his intent to catch up with Google in the online advertising market, and firmly believes that combining forces with Yahoo is the only chance Redmond has to succeed. Much like the way the company poured billions into its Xbox gaming division to compete with Sony Playstation, Microsoft will do the same to go after Google. Microsoft has $21 billion in cash and is willing to issue debt to finance the deal that’s worth more than $40 billion.

“Ballmer offered a 62% premium. He wouldn’t have done that if he was just kicking the tires around,” Owers says. “That’s considered a blowout bid. And a blowout bid bid signals a determination to prevail.”

By Scott Moritz

Heads have started to roll at AMD (AMD), as technology chief Phil Hester resigned with no replacement planned, according to the Wall Street Journal.

The news comes less than a week after the chipmaker announced a 15% sequential sales shortfall and plans to cut 10% of its staff due to weak demand across all its business segments.

AMD did not immediately respond to a request for comment.

Analysts point to a slowing economy and a critical delay of AMD’s quad-core Barcelona chip for the server market as two major reasons for the company’s current woes.

AMD, which has already pulled Hester’s bio from its Web site, called Hester the top executive “responsible for setting the architectural and product strategies and plans for AMD’s microprocessor business.”

The company is in a brutal battle with rival Intel (INTC) and has been on the losing end recently due to misfirings like the Barcelona glitch. AMD follows Intel’s earnings report Tuesday with its full first-quarter report on Thursday.

AMD shares were down a nickel to $6.22 in midday trading Friday.

By Scott Moritz

The tech sector — read Cisco (CSCO), EMC (EMC), Dell (DELL), Hewlett-Packard (HPQ) – got hit with more bad news as computer networking shop Foundry (FDRY) reported a sales shortfall in the first quarter. The news comes on the same day that everyone’s favorite conglomerate, GE announced a stunning profit warning  sending the market down early Friday.

GE (GE) said its weakness was in its financial services business, tied to a slowing economy and a rough credit market. The rising economic pressure has helped dampen demand for new information technology systems says Foundry, which cut its first quarter sales target to $149 million, 9% below analysts estimates.

In the first quarter, business was more challenging because the “macroeconomic environment evolved from the financial market crises which we believe led some customers to delay their purchase decisions,” Foundry CEO Bobby Johnson said in a press release.

The news gives tech investors another splash of ice water and comes two weeks after Fortune reported that Cisco was doing some belt tightening as growth in orders slows.

Foundry shares fell 9% and Cisco was down 2% in early trading Friday.

By Yi-Wyn Yen

Yahoo and Time Warner’s AOL are negotiating a deal to combine their Internet operations, a source told Fortune.

The news was initially reported in the Wall Street Journal, which stated that Time Warner (TWX) would fold AOL into Yahoo and make a large cash investment for a 20% stake of the combined company. In return, Yahoo would repurchase several billions of its shares in the mid-$30 range. Time Warner is also the parent company of Fortune and CNNMoney.com.

For Microsoft, this means war. The Journal and New York Times have also reported that Microsoft (MSFT) is now in talks with News Corp. (NWS) for a joint bid for Yahoo. Last Saturday, Microsoft CEO Steve Ballmer sent a strongly-worded letter to Yahoo’s shareholders that it should accept its offer within three weeks or face a proxy fight to nominate a new board of directors.

Yahoo is also looking at a possible advertising deal with Google (GOOG). Just hours before the news leaked of Yahoo’s advanced talks with AOL, the Internet portal announced that it would run a preliminary two-week test to run Google’s search advertising.

Yahoo, which has rejected Microsoft’s bid worth $31 a share, is hoping that a partnership with AOL and a possible advertising deal with Google, will be a more attractive offer to its shareholders. There’s no guarantee that Yahoo’s shareholders will go along with the deal if Microsoft comes back with a higher offer.

Many industry watchers continue to believe that accepting a deal with Microsoft is the best solution for Yahoo. “We continue to believe reaching a mutual agreement with Microsoft would be the best way for Yahoo to potentially extract a higher bid,” wrote UBS analyst Ben Schacter in a note late Wednesday. “The alternative would be for Yahoo shareholders to tender, although this process would not be as expeditious as if the two sides were to come to terms, and could involve a lower offer price, making the battle potentially even more protracted.”

Showing it has alternatives to Microsoft’s hostile merger bid, Yahoo (YHOO) is talking to Google (GOOG) about a joint search-advertising trial, according to a report posted on The Wall Street Journal’s site.

The discussions with Microsoft’s biggest rival come less than a week after Yahoo was given a 3-week deadline by Microsoft to come to the table and negotiate.

The tests are to be limited and not nessarily a deal killer for the Microsoft/Yahoo takeover, but it could lead to a larger partnership between the two search engine giants, the Journal reports.

One of the issues the outsourcing of search ads to Google would address is the heavy costs Yahoo faces in hosting and powering its own server facilities and infrustructure.

Yahoo, along with large shareholder Legg Mason, are attempting to show that the company can thrive independently if necessary.