October 17, 2005

Deviating a bit to better accomodate Wall Street's way of doing things, Google will amend its quarterly financial results in adding new earnings numbers that differ from traditional accounting practices.

Despite these changes, Google will continue to report its earnings under GAAP.

In the process, Google will list its "pro forma" earnings (what it's profit would have been) if not for a recurring charge for stock-based employee compensation that's unrelated to its ongoing operations.

The move, disclosed Thursday on Google's Web log, is designed to clear up recent confusion about whether the rapidly growing company's profits are living up to analyst expectations.

Hoping to bring more clarity, Google will list its "pro forma" earnings -- essentially what its profit would have been if not for a recurring charge for stock-based employee compensation that's unrelated to its ongoing operations. Google also will continue to report its earnings under GAAP, the generally accepted accounting principles that include all the special charges.

The Mountain View, Calif.-based company plans to provide both earnings figures beginning with its third-quarter report next week.

Providing pro forma earnings isn't unusual, particularly in the technology industry, but it's a significant departure for Google because its iconoclastic management has vowed to defy Wall Street's traditions.

Investors prefer a pro forma breakdown because that's the way industry analysts typically project corporate earnings. The analyst calculations can make or break a stock, depending on how much a company's reported earnings exceed or miss the consensus estimate.

Although relatively minor, yesterday's concession signals Google has become more amenable to some of the stock market's conventions during the 14 months since the company went public.

"The company has made it very clear that it wants to adhere to its own set of rules and while that is an admirable goal, it doesn't make a lot of sense when you're dealing with simple requests for more clarity," said Standard & Poor's analyst Scott Kessler. "They probably realized the benefits outweighed the costs of doing something like this."

The change also may reflect Google's efforts to reduce the chances for a misunderstanding that could hurt its stock price and damage employee morale. Virtually all of Google's workers own a stake in the company.

Google continues to thumb its nose at Wall Street in other ways. For instance, management still won't share its earnings outlook for future quarters, nor will it schedule face-to-face meetings with the analysts trying to make sense of its business strategy for investors.

"They still have a long way to go," said American Technology Research analyst David Edwards. "The fact that they don't follow those conventions exposes Google's stock to more risk."

Google's shares fell US$3.53 yesterday to close at $297.44 on the Nasdaq Stock Market.

Although Google's stock has more than tripled since its August 2004 initial public offering, the company's refusal to provide pro forma earnings has frustrated people trying to compare the GAAP profit to the consensus analyst estimate.

In July, for instance, Google reported second-quarter earnings of $1.19 per share -- a figure below the consensus estimate of $1.21.

The company didn't report how much it would have earned if not for a charge to account for the employee stock options it issued before going public -- a cost analysts had stripped out of their estimates.

The information vacuum resulted in widely ranging estimates of Google's pro forma earnings, creating confusion that contributed to a sharp drop in the company's shares shortly after the second-quarter results came out.

Source: eCommerce Times

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