The Wall Street Journal has a well-done explanation of the whole thing in today's edition (subscription required).
In short, the WSJ confirms what I posted last week -- that analysts' average estimate for earnings per share of $1.21 was for "pro forma" earnings. Google didn't provide this number anywhere in their press release or in the conference call -- they just provided the GAAP earnings number of $1.19 per share. So unless you really dig, and even make some educated guesses about tax rates, you wouldn't know that Google's actual pro forma earnings were $1.36 per share. For all but the most diligent investors, it looked like Google missed the target by 2 cents when in reality they dramatically exceeded the target by 15 cents.
Here are a few snippets from the WSJ article. You can also read my posting on the earnings release, which explains in more detail the difference between GAAP and pro forma earnings.
Because Google didn't publish the pro forma number that analysts were targeting in the press release or on the conference call, they had to reach out individually to clear up the confusion:
Minutes after releasing earnings last Thursday, Google Inc. contacted some journalists to clear up apparent uncertainty over the company's per-share expense for stock-based compensation and whether that expense caused Google's results to fall short of analysts' estimates ...
It looked like Google missed their numbers and the stock dropped:
Google's net income for the second quarter surged more than fourfold to $1.19 a share, including the costs for stock compensation. Analysts' consensus forecast was for $1.21 a share, but that excluded the [stock-based] compensation ...
The initial appearance of an earnings "miss" helped drive the stock down more than 10% at one point in after-hours trading Thursday evening ...
Not only didn't Google explicity state the pro forma earnings number that analysts were targeting, but the information needed to calculate it was in several different places:
Google didn't provide a per-share number comparable to the analysts' consensus, as provided by Thomson First Call. Instead, the company explicitly outlined the calculations necessary to derive the number, excluding stock-compensation costs, on the first page of the release ... Anyone wanting to tackle the calculation also needed to know the number of Google shares outstanding -- provided several pages further down in the release -- to come up with the earnings per-share number comparable with First Call's forecast.
Even Thomson First Call, the firm that tallies analyst estimates, had trouble figuring out what numbers to use from Google.
First Call had to figure out the stock compensation's effect on the forecast on its own. The next morning, Friday, the forecast tracker spread the word that Google had earned $1.36 a share excluding the stock-compensation costs. It did so after following up with analysts who originally provided the First Call estimate.
"This has happened with Google for a few quarters now," says John Butters, a First Call analyst.
Google's not just a bumbling idiot, they're trying to avoid the excesses of the dot-com bubble when all sorts of non-GAAP earnings numbers were published. Google is trying to highlight the numbers the accountants and auditors prefer, which treats stock options as an expense. But analysts aren't targeting this number, and Google isn't providing enough hints to make it easy to see if they had a hit or a miss:
Promoting the bottom line over adjusted, or otherwise non-GAAP, numbers is seen by many as good practice -- after all, the anything-goes reporting that was prominent a few years ago made many earnings releases suspect.
"If you want to put in a press release an earnings-per-share number without stock-based compensation, you can do that, but the GAAP numbers have to be more prominent than non-GAAP numbers," said Bill Sherman, co-head of the public-companies practice and a senior partner at the law firm Morrison & Foerster.
Remember that Google snubbed its nose at Wall Street in the IPO by doing a Dutch auction of shares, and repeatedly stated that the company wouldn't get caught up in the quarterly game of trying to hit Wall Street's earnings targets. It's rich irony that the counterculture king of simple information delivery doesn't release earnings numbers that analysts and journalists can figure out -- let alone the ordinary Google investor.
Thomson First Call may not even attempt to decipher the numbers next quarter:
Maybe analysts should start targeting GAAP earnings rather than forcing companies to go through all these machinations.Mr. Butters says that with future Google earnings he is about ready "to let the analysts get back to us" with their final number for per-share income rather than try to glean from the company's earnings release whether Google met expectations.
The irony to that scenario, of course, would be that investors who really wanted to know what Google's view of its own earnings are would have to ask Wall Street.