Memo to Google: Don't Be Half-Pregnant

I'm going to go out on a limb here and make two assumptions.  First, CFO George Reyes did not intentionally "commit news" at the Merrill conference.  Second, even the company would probably agree that, webcast or no, today's media and market cyclone was not the ideal way to share new information with thousands of shareholders.

I think what happened is that George Reyes simply inadvertently said a bit more than he had said previously, perhaps because he has answered the same question internally dozens of times in the month since the conference call.  This often happens to companies that are half-pregnant with regard to Wall Street communications: Under pressure to disclose more, they often loosen up a bit, but not enough to leave anyone satisfied.  And they often share information inadvertantly, via body language and casual slips, thus forcing anyone who has even the most distant interest in the stock to monitor and dissect (in real time) absolutely everything that they say.

This does not mean that Google has to start publishing guidance and sucking up to the street. It does mean, I think, that the company should simply never comment on the current tone or direction of business outside of quarterly conference calls (especially verbally and especially during market hours).  It also means, I think, that if the company wants to maintain its "We don't worry about the near-term" stance, it should consider not saying anything to Wall Street outside of its quarterly conference calls (no conferences, no one-on-ones, no investor visits).  If the company really isn't worried about the short-term, the quarterly conference calls, plus an annual analyst day, should be more than enough.

And if my assumptions are wrong, and Reyes was intentionally divulging new information (while maintaining deniability) to either let the air out slowly , or, worse, to reduce expectations so the company can once again shatter them, then the communications policy really needs to be revisited.  Because this means that the company is playing exactly the same game that pretends to have such scorn for, a game that its founders' idol, Warren Buffett, would likely consider both manipulative and juvenile.

Comments

[Bradley Twohig]

I have had the pleasure of meeting Buffett and I can say he is a shamefull promoter of potential poor performance of Berkshire. The only difference is Buffett is always telling his investors that in all likelihood the sky will fall tomorrow.

I think the key is to pick a communication strategy and stay consistent. Buffett has never been mysterious or tight lipped, he is just always cautious with his forecasts. Set the bar low, that way no one can yell at you when you don't hit it.

[Bradley Twohig]

Shameless Buffett Photo:
http://btwohig.wordpress.com/2006/02/19/chilling-with-the-oracle/

[Bjorn]

While the means of communicating the news is suspect, I think this is not terrible news for Google. It's also good for investors. Wasn't it obvious that the growth it had experienced so far wouldn't last forever? Unlike other corporations, Google has an artless truthiness to it. They would have gained more maybe, from withholding the information longer, but instead investors have a better picture of what's going on. I don't think that's a bad thing. And yes 'truthiness' is a word, just as Stephen Cobert! ;P

[anon]

As you've mentioned before, the company hired an IR firm to survey analysts about what they want to hear at the upcoming Analyst Day. The "We don't worry about the near-term" stance doesn't seem to be on solid ground.

Despite several things this company has claimed they'd stand for, their recent actions seem to indicate otherwise. I doubt if the CFO would be dumb or clumsy enough to just "blurted it out" by mistake. After all, this company has the reputation for hiring the brightest minds out there, or at least that's what lots of people believe -- or led to believe.

After the last earning report, the management should have learned very well what could happen to the stock price with just a little uncertainty regarding future earnings, and that's probably the reason for the hiring of the IR firm.

So although I have to give George Reyes the benefit of the doubt, to think that he inadvertently said something that happened to cause the stock to tumble today seems absurd. As a CFO, he should know more than anybody else the effect of a confirmation from the company regarding its future growth.

If I have to err, I'd err on the side that your assumptions are incorrect, i.e. your last paragraph hit the nail right on its head, and Reyes knew exactly what he was saying. And if this is an "under promise, over delivery" strategy for the future (since the company has leaned the outcome of "over expectation, under delivery" from last quarter's results), then the company'd be playing the very game that it claimed to despise, but enormously enjoyed by Wall Street.

However, if what Reyes said was unintentional, then together with the tax blunders of the last report, it'd seem that he did an utter disservice to the company's shareholders, and has shown he's not competent enough in that position -- to say the least.

Another thing to keep in mind is that the company's management is probably fully aware of several recent articles regarding insider selling, and try to be more transparent in a "subtle" way to avoid any potential shareholders' lawsuits in the future.

Add that to the fact that numerous sellside analysts kept urging investors to buy during the decline, and we can see lots of naive investors get hurt by these irresponsible comments and/or recommendations. How many people bought the stock when it was over $450, with numerous "buy on momentum and future growth", together with $600 or $2000 targets? And how many buy with numerous "buy on weakness" recommendations after it fell under 400? Most people that bought "on weakness" from the decline since the $475 top are way under water right now.

Some of those who are lucky enough (or technical enough) to buy near the $340 level less than 2 weeks ago would also very likely have been stopped out today within less than 10 minutes, with little or no gains (or even losses), depending on where their stops are. Those that bought at the 340 level and don't use stops at all were just lucky to blindly and narrowly escape today's blood bath, but maybe not for long.

And yet, even after today comments from Reyes, some of these Wall Street crooks kept pumping the stock and urged the little people to buy more. After all, some would have to buy the stock so their investment banking clients can get out at a "reasonable price".

Wall Street's game has never changed, but it's partially the little investors' fault as well, since they readily fall for the same craps over and over again, and as the saying goes: "Those who do not learn from history are doomed to repeat it."

[B]

It's total arrogant bullsh*t to say you don't care about what analysts or WS think. It's easy to make such prideful statements when your stock is up 500%. It's something else when your personal net worth drops by 37% in a month. Then, you are pissing down your leg wondering how those cocky comments can be retracted because the bid is out from under your stock and big boys and girls are distributing it in heavy volume. Let's see that cocky arrogance if the economy hits the skids and it closes below 100. That would take the compounded annual return down to what? S&P returns? lol. Arrogance, immaturity and ignorance are not pleasant traits to exhibit as the CEOs, primary owners or what ever their titles are. That said, I tend to agree with the premise of their statement. Companies that are focused on quarterly earnings are possibly managing without any long term "strategery". It's just the constant foibles and lack of polish that make their methods so ridiculous.

They need to shut up, hire a polished PR exec to make their public statements beyond earnings calls and do what they do best. Focus on geeky stuff to maintain their leadership position which is still increasing.

[Sterling]

I will reiterate my comment after the Q4 earnings fiasco. The problem with this company is that it is a blackbox, and NOBODY, not the investing public, definitely not the analysts...not even the company itself, knows what the growth rate of this company is. Analysts haven't even been close in their estimates thus far. Ebay has a 24 hour control center where they are tracking transactions, listings, PayPal transactions, etc. They can at least get general ideas of peak days and hours when the business ebbs and flows. It's not precise, but compared to trying to figure out who's going to type a word into Google and then click on a search link it looks like the precision of a NASA space launch. Google can get an idea of search trends from certain keywords by the bids placed on CPC's and their CTR's, etc., but that is hardly any way to forecast quarterly revenue...let alone put a number on the growth rate. Yahoo sells most of its adspace well in advance based on a much more predictable model. Much more like a typical media company.

If you really want to know why Google's management can't give guidance...it is because they don't have any way of knowing themselves. It's simply too unpredictable. How many words are in the dictionary? How many proper nouns are there in the world? How many languages are their searches in? What is the CTR of keywords X, Y, and Z (let alone every possible word) on a Monday morning in late February worldwide with a CPC that ranges within one standard deviation of what it was last February? What's the growth of paid search in China for the next 3 months? Dare I say it...what's the tax rate going to be this quarter? Google would have to hire a whole other staff of PhD's to figure all those permutations out for a specific 90-day period, let alone a reasonably accurate 12-month forecast. Of course they can't give guidance. That said, I think Reyes is sandbagging in more generally qualitative terms. If not, he's a complete fool for making those remarks today.

[wyler]

Place my vote for unintentional. If preplanned, the smart guys at Google would have let Reyes know that he was talking about the law of diminishing returns (the tendency for a continuing application of effort or skill toward a particular project or goal to decline in effectiveness after a certain level of result has been achieved) -- not the law of large numbers (or Bernoulli's law -- the average of a large number of independent measurements of a random quantity tends toward the theoretical average of that quantity).
[definitions through answers.com]