While most look forward to tomorrow's earnings announcement from Google with hope that it is not a replica of the early-announced Q3 earnings fiasco from October which went the 2nd most widely held hedge fund stock plunging by some 7% in seconds, many have missed that late on Friday, Google issued a release on its Investor Relations website which however was not matched by an 8-K in EDGAR (recall the Reg FD hot water Netflix got in over a comparable PR flap) - a release that some have interpreted as an ad hoc warning that the company may in fact miss expectations once again.
And now for a little accounting…
In anticipation of our upcoming earnings release and given our pending Motorola Home sale announced in December 2012, we wanted to remind everyone about the related accounting treatment of this deal, known as “discontinued operations.” In short, financial results from Motorola Home will be presented as a separate line item in our 2012 consolidated statements of income. While this is a standard accounting treatment (more details below), people who follow our company may not be fully aware of how it impacts our financial reporting. For example, as of this writing, a majority of Wall Street analysts who cover Google have not reflected the Home business as discontinued operations in their estimates.
At the risk of boring everyone silly, here are the nitty-gritty details:
In accordance with U.S. generally accepted accounting principles (GAAP), an entity is required to present the results of a business to be disposed as discontinued operations if the business is clearly distinguishable from the rest of the entity and the entity will not have any significant continuing involvement in the operations of the business after the disposal. Results from discontinued operations are required to be presented separately from the results of continuing operations, below net income from continuing operations.
As the sale of the Home business meets the above U.S. GAAP criterion, we are required to present the Home results as discontinued operations in our consolidated statements of income. That means our net income for this quarter as well as for Q212 and Q312 will be split between our ongoing operations and the Home business. Note that assets and liabilities of the Home business will not be separated out from our other reported financial and operating measures, such as our consolidated cash flow and balance sheet as the Home business is not material to those measures.
Posted by Brent Callinicos, VP, Treasurer and Chief Accountant
Just an accounting footnote clarification from the firm's Treasurer? Maybe. Maybe not. Here is how some others translated the rather odd notice, which once again, did not have an 8-K to go alongside the website-only release. From Reuters:
Google Inc issued a rare advisory to Wall Street on Friday that analyst estimates for its fourth quarter financial results are flawed.
The world's No.1 search engine, which reports its quarterly results on Tuesday, said most analysts have not adjusted their estimates to reflect the pending $2.35 billion sale of the Motorola Home business.
The discrepancy means the fourth-quarter net revenue that Google reports on Tuesday could appear to be less than the $12.34 billion average that analysts polled by Thomson Reuters I/B/E/S are expecting.
Raymond James analyst Aaron Kessler says his fourth-quarter net revenue estimate includes nearly $900 million from the Motorola Home business.
"They're saying that the headline number is going to be less than what most analysts have for Q4," said Kessler.
The advisory is a rare move for Google, which does not provide financial forecasts and typically has limited interactions with analysts. The company has in the past provided accounting advisories to analysts about the Motorola Mobility business, which Google acquired for $12.5 billion in May.
Analysts expect Google to report adjusted earnings of $10.56 per share for the fourth quarter.
"It's a little surprising that they're doing this the Friday before the report," said Kessler. "They should have put it out a week ago if they wanted analysts to change their numbers."
One week in, Q4 earnings season has been relatively tame, and thanks to the now traditional accounting gimmicks from the banks, has in fact beat top and bottom line expectations. Is Google about to be the first company that upsets this trend? And will the miss be blamed on analyst misunderstanding of expectations, and their inability to understand the difference between continuing and discontinued operations? In a world in which CAT expects its investors to believe that half of its Q4 earnings were just wiped out because "someone" did not do their due diligence on a Chinese bolt on acquisition, this is certainly a possibility.
And with trading closed today, the rush will be on tomorrow as investors and traders scramble to understand just what GOOG is set to report after the close, or, as the case was last time, unexpectedly sometime in the middle of trading day.
And the same from the perspective of Bing...