First, the facts first about Google's first quarter results, from the Wall Street Journal. Google's shares surged more than 17% in after-hours trading after it reported first-quarter profit rose 30% from the year before, compared with 17% profit growth in the 2007 fourth quarter. Revenue rose 42% from a year earlier. In 4 p.m. Nasdaq Stock Market composite trading, Google's shares dropped $5.49, or 1.2%, to $449.54. Following the news, shares rose 17% in after-hours trading to $526.62, adding almost $25 billion to the company's valuation. International operations generated 51% of Google's revenue in the first quarter, compared with 48% in the fourth quarter. Google's employee growth rate in the first quarter climbed to 14%, compared with 6% in the fourth quarter.

Abject lesson in how to earn $25 billion in a day. Its all about managing expectations. For weeks, if not months, everybody has expected Google to keep slipping - search market share, revenue growth, share price - Everything seemed to be heading south. The bedlam that broke loose after GOOG Q1 profits were announced was mostly driven by people being surprised by the reversal of the trend.

So was it a case of 'managed expectations' or that analysts simply read the data and came to the wrong conclusions, in a herd mentality? John Letzing, Marketwatch has some answers. Recent data from comScore Inc. has shown tepid paid-click growth during the first quarter, stirring concerns about the impact of the U.S. economic slowdown on Google and helping send its shares more than 30% lower between the beginning of the year and Thursday's earnings report. During a conference call with analysts, Chief Executive Eric Schmidt noted that the paid-click growth was "much higher than has been speculated by third parties." Google has argued that much of the slowdown in its paid clicks has been due to its own quality initiatives, such as reducing accidental clicks by shrinking the graphical format of search ads. In addition, Google also has raised the cost for advertisers seeking to bid on some of the more attractive keywords, in an effort to wrangle a larger amount of revenue from a smaller number of clicks.
So I'd say it was a mix of both. Even though Google does not release forecasts, sometimes not saying anything is in itself a forecast. Their silence when faced by reports of problems with paid click growth led the markets to believe that Google was indeed having problems and GOOG was rapidly downsized. Now Eric Schmidt says paid click growth was much higher than the speculation. So, ok, I'd say that Google played the market a little bit.

On the other hand, nobody really gave much thought as to why the growth in paid clicks was stagnating, the common assumption being that the economy was in a funk, and google had no more room to grow at present. Appears that there are other, and valid, reasons. Such as the fact that Google intentionally reduced the number of clicks by increasing the cost per click for some keywords. Which left their revenue growth intact while leaving a superficial impression that clicks on Google's ads were suffering. Which is what led to the surprise bedlam when the first quarter results came in.

End game - Google wins again. Forecast? Straight from Eric Schmidt's mouth, via CNet News. "It's clear to us that we're well positioned for 2008 and beyond, regardless of the business environment that we find ourselves surrounded by," Schmidt said on a conference call. "We've looked at this really carefully, and we do not see an impact as of this time." And if economic conditions do deteriorate, Google expects to weather the storm fine, Schmidt added. "Our conclusion is we're well positioned should economics change. We continue to do well because our model is so targeted, and targeted (advertising) does well in most scenarios," he said.

I don't know what I like more - Google's confidence or their blatant disregard for the state of the economy - But in any case, it's very refereshing to see a company state categorically that they couldn't care less about the chaos on Wall Street.