Google stunned Wall Street Thursday by accidentally releasing its third-quarter earnings report four hours ahead of schedule. Even worse, the search giant’s financial figures came in well below analyst expectations on both overall revenue and profit. The botched release threw Wall Street into turmoil, dragging down other Internet stocks, including Facebook, as well as the broader Dow and NASDAQ indices.
“I am sorry for the scramble earlier today,” Google CEO Larry Page told Wall Street analysts after the market closed. “As our printer said, they hit send on the release just a bit early.”
Page didn’t address Google’s 20% third-quarter profit decline. Instead, he touted the fact that 14-year-old Google increased quarterly revenue by 45% to reach $14 billion. That puts Google on track for over $60 billion in revenue over the next 12 months. Page argued that Google is well-positioned on Internet search, mobile advertising and local commerce.
Taken together, the botched earnings release and the soft numbers caused Google shares to fall off a cliff by 9% in mid-day trading, wiping out $20 billion in market value in under 20 minutes before trading in the stock was halted by the NASDAQ exchange for some two-and-a-half hours. Once trading resumed, Google shares inched higher. This debacle raises several questions.
Another Market Snafu: First, how is it possible that one of the world’s largest and most sophisticated technology companies allowed its earnings report to be delivered to the Securities and Exchange Commission with a second paragraph that read “PENDING LARRY QUOTE”? In a statement from Jill Hazelbaker, Google’s corporate communications chief, the tech giant said that R.R. Donnelley, its financial printer, “informed us that they had filed our draft 8K earnings statement without authorization.” One can only imagine the conversation when Google’s lawyer called the NASDAQ stock exchange and requested a T-1 halt on the company’s stock, four hours before the company’s earnings call. Google shares wouldn’t resume trading for over two-and-a-half hours.
In a statement, R.R. Donnelly said it was “fully engaged in an investigation to determine how this event took place and are pursuing our first obligation — which is to serve our valued customers.” Capturing the prevailing sentiment on Wall Street, real estate mogul Donald Trump appeared on CNBC after the closing bell with a simple, if predictable, message for R.R. Donnelley: “You’re fired.”
There’s a larger issue here. This is the third major U.S. stock market technical snafu this year, following Facebook’s botched IPO and Knight Capital’s $458 million software glitch. The reason that large public companies wait until after the market closes to release their earnings reports is to avoid this kind of knee-jerk reaction, by both day-traders and automated trading systems. Once again, Wall Street found itself debating whether the error was a so-called “fat finger” move — in which someone accidentally pressed the wrong button — or something more ominous. It makes you wonder who, exactly, is running the show at these major stock exchanges. And how can such chaos be prevented from happening again?
It absolutely beggars belief that a top financial printing company would not notice that the second line in the release of a $227 billion tech icon contained a non-existent CEO quote. Who is reading these SEC documents before they’re sent, anyway? Needless to say, it’s highly unlikely that R.R. Donnelley will ever issue another Google earnings report, and this debacle should motivate Google to take control of its own financial information disclosures.
It’s no wonder that the American public has such a dim view of Wall Street. These financial geniuses keep screwing up on their own supposedly state-of-the-art systems. Many Americans already think Wall Street is a rigged game. But these incidents make Wall Street look like a game rigged by incompetents.
Mobile Disruption: Google’s earnings were disappointing, but the stock didn’t deserve to lose 9% Thursday — investors can thank R.R. Donnelley for increasing the plunge. Like every other technology company, Google is being rocked by the massive, fast-moving structural shift from personal desktop computers and laptops to networked mobile devices like smart phones and tablets. In the short-term, this trend is causing turbulence in the industry because mobile Internet ads are less advanced than traditional desktop ads, which means they make less money. That is part of the reason that a key Google financial metric — cost-per-click (CPC) — declined by 15% last quarter. To put it bluntly, mobile ads make less money for Google than desktop ads — for now. Facebook has a similar problem.
J.P.Morgan tech analyst Doug Anmuth is confident that time is on Google’s side. “The shift toward mobile search — or rather the new reality of ubiquitous devices and seamless screens as portrayed by Google — is likely to remain choppy in the near term based on the still early stages of mobile advertising and mobile search behavior,” Anmuth wrote to clients Friday morning. “However, we continue to believe Google is well positioned to benefit in a mobile world as search easily ports over to mobile devices for users, mobile search volume becomes more incremental, and mobile CPCs increase over time.”
Every major technology player is racing to improve the mobile experience for users, and the competition is fierce. The two biggest players, Apple and Google, are locked in an epic, worldwide struggle for advantage in the mobile space. It’s a beautiful thing, watching these two innovation icons devoting billions of dollars to devising the next generation of mobile products. What’s not as thrilling is the worldwide patent war that’s distracting these players. There are the faintest signs of détente, but it’s way too soon to bet on a meaningful patent pact between Apple and Google.
The war between Apple and Google is important for the future of computing because the companies are bringing diametrically opposed models to the battlefield. Apple’s model is end-to-end control, software-to-hardware. Google’s model is to give away Android OS for free and unleash developers worldwide. Apple makes $200 per iPhone, Google makes less than one dollar for every Android unit that is sold. The iPhone is the gold standard for smart phone design worldwide, with millions of hard-core adherents. Google is activating over one million Android handsets per day; what it lacks in per-unit-revenue, it’s hoping to make up in scale and ubiquity. On the conference call, Page said that Google’s mobile business is now generating $8 billion annually, up from $2.5 billion last year.
More Motorola Problems: Google CEO Larry Page bought Motorola Mobility as a defensive patent play to build the search giant’s intellectual property arsenal in the ongoing patent wars, which are being driven by Cupertino, Calif.-based Apple. Page had to make a decisive move on the patent front after re-assuming command of Google last year, but he’s just been saddled with an operation that’s no longer globally competitive, as well as over 20,000 additional employees. Google’s Motorola business lost $151 million last quarter. That’s six times worse than the $25 million loss that Wall Street had been expecting.
Google’s stock market performance on Thursday was an unmitigated disaster. But if you believe the long-term Google story, it should have been a buying opportunity. “While the timing and the headlines are a mess, the fact is that the top-line fundamentals for Google’s core business are solid,” Macquarie analyst Ben Schachter wrote to clients. He’s got a point. Google’s fundamentals remain strong.
The larger problem is that global macroeconomic conditions are bad and getting worse from North America to Europe to Asia. Consumers are holding off buying electronics until the holidays, and businesses are delaying capital tech purchases until next year. And as much as the two U.S. presidential candidates attempt to wax eloquent about boosting the U.S. economy, little is going to get done until after the election.
Larry’s Health: For the last several months, Google watchers have been growing increasingly concerned about the health of company CEO Larry Page, who missed the last earnings call and a major product launch three months ago due to voice problems. On Thursday’s conference call, Page sounded very hoarse, and strained to use his voice. I’m not going to dwell on this topic. Google has a fiduciary responsibility to its shareholders to disclose serious, material health issues involving its CEO.
At Google Zeitgeist, earlier this week, Page sounded better (see below), but it was hard not to notice the three bottles of spring water sitting next to him. By the end of Thursday’s earnings report, Page could barely speak, but he was helped by his key lieutenants, most notably CFO Patrick Pichette. Google shareholders worldwide are wishing Larry a speedy recovery.
Here’s Google CEO Larry Page speaking at Google Zeitgeist earlier his week:
With apologies to Judith Viorst.