Google Releases Note Late Friday Raising Alarms

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Google (NASDAQ: GOOG) put out a rare note/forewarning about its upcoming earnings report for the fourth quarter on Friday, indicating its earnings may be lower than analysts’ estimates. When I learned of the note, I immediately had flashbacks to the debacle that took center stage when the company released its third quarter earnings report.

Just as in October, when Google’s stock declined after investors learned the worrisome impact that the Motorola Mobility acquisition was having on the company’s financials, I worry that this latest revelation will again cause investors to flee the stock.

You may recall third quarter earnings missing both sales and profit estimates. That, coupled with the earnings report being accidentally released in draft mode ahead of the scheduled time, sank the stock then. This time, the oddity relates to the note, which was posted on the company’s website by its treasurer and chief accountant Brent Callinicos. Google bought Motorola Mobility in the spring of last year for $12.5 billion, making it the most expensive acquisition in the history of the company.

I still see the transaction as being worth it because it allows the search engine giant to be able to make its own phones powered by its wildly popular Android operating system. This gives it a boost to better compete with handset makers like Apple (NASDAQ: AAPL), Nokia (NYSE: NOK) and Research In Motion (NASDAQ: BBRY), all of which are among the top smartphone makers in the world. Samsung devices powered by Android are selling like crazy, while the chief rival, Apple, is being plagued with assumptions that sales of its iPhone 5 have been below expectations. Nokia even reported an increase in shipments of its flagship Lumia phones recently. Rim's new BlackBerry 10 is due to be released at the end of the month, and it has caused some buzz because of its features.

The note released by Callinicos Friday basically says analysts’ estimates may not be correct because they did not take into account Google’s pending sale of Motorola Home, a TV set-top box business. It inherited the segment when it bought Motorola Mobility last year. Motorola Home is pretty much useless to Google considering its ecosystem revolves around mobile. Google sold it to ARRIS Group in December for $2.35 billion.

In Callinicos’ words:

“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.”

Google did not name which analysts’ estimates may miss the mark because of the way the Motorola transaction was reported in its 2012 consolidated income statements. Instead, in the three-paragraph note, Callincos summed up (and downplayed any possible negative fallout from how the Home business’ discontinued operations were reported) by stating simply, “At the risk of boring everyone silly, here are the nitty-gritty details…”

Even with the seemingly ominous note, Google’s stock didn’t tank upon its release. That’s likely due to the note being released just before the closing bell on Friday. It’s unlikely the stock will move much on Monday either. My guess is that investors will wait until the fourth quarter earnings report for 2012 is released, and that is not scheduled until Tuesday after the closing bell.

In the meantime, I’ll be stewing over the stock’s performance in the last few quarters since it acquired Motorola Mobility. As part of its 2012 third quarter earnings report, Google reported a GAAP operating loss for Motorola of $527 million. Of that, $505 million was for the mobile segment, while the remaining amount was for the home segment. Non-GAAP operating loss for Motorola in the third quarter of 2012 was $151 million, or negative 6% of Motorola revenues.

Perhaps any losses Google reports for Q4 related to the Motorola transaction will be mitigated by an up-tick from ad revenues, which are its bread and butter.

As I wrote last week, a main challenge for Google this year, as well as for future years, relates to its display advertising. This is especially the case as the importance of capitalizing on mobile advertising grows. Consider this. Google loss market share to Facebook in 2011. However, it regained the number one position last year, and is expected to retain it through 2014.


TwillyD has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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