Google to report pro forma earnings, not just net

SAN FRANCISCO (Reuters) - Google on Thursday said it plans to meet Wall Street halfway on how it reports quarterly results, seeking to dispel confusion created by its strict adherence to accounting rules and putting it in step with many of its peers.

The web search leader said it will present third-quarter results next Thursday in operating terms, excluding such items as the after-tax effect of expensing employee stock options. It has previously reported in net terms only.

Mark Fuchs, chief accountant of the Mountain View, California-based company, detailed the plan in a statement released on Google's company blog.

In the first four quarters after its successful initial public offering in August 2004, Google has flouted Wall Street convention by not providing financial forecasts and by only presenting a view of net income in its reports.

That practice -- an attempt to strictly abide by US Generally Accepted Accounting Principles, or GAAP -- put Google at odds with many US listed companies. Technology companies in particular often downplay net results in favour of less-formal measures of their financial performance.

Quarterly earnings reports from most of these companies include a second set of so-called pro forma figures that distinguish between operating and nonoperating items.

"In the past, we've only provided GAAP EPS (earnings per share)," Fuchs writes. "But because Wall Street analysts typically estimate and describe our results with non-GAAP EPS numbers, that resulted in some confusing apples-to-oranges analyses of our results."

Analysts often say they prefer the operating figures because this presentation allows them to look through acquisition costs and option expenses to gain a clearer picture of how well a company is doing on an ongoing basis.

"Investors prefer to see it both ways because pro forma results give a true operating picture of the company," said Hoefer & Arnett analyst Martin Pyykkonen in Boulder, Colorado. "It's really just about transparency."

Analysts often bypass stock option expenses when formulating their profit forecasts.

These in turn become the basis of consensus earnings forecasts assembled by Thomson First Call and Reuters Estimates that typically serve as the single most important number investors use to evaluate quarterly profit trends.

Confusion among investors, analysts and the news media in the first few minutes after Google has released quarterly results has contributed to volatility in its stock as market players struggle to sort out how net profits compare with Wall Street's hopes.

The company typically cleared up the confusion an hour or so after the release, when it would detail both its net results and various non-GAAP pro forma measures in a conference call with investors.

Next week, and for the future, Google will simply place an addendum to its normal net income presentation that seeks to reconcile the effect of employee stock options to those results, it said.

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