CFO’s focus on discipline soothes Google investors | In Person

Adult supervision is back at Google.

Ruth Porat, a former chief financial officer at Morgan Stanley, recently made her public debut as Google’s chief financial officer, speaking and fielding questions at Google’s earnings news conference. To say she was well received would be putting it mildly: Google shares added about $60 billion in market capitalization the next day, the biggest one-day gain in market value for any company ever.

Since going public in 2004, Google has struggled with the perception that it’s being run by brilliant but overgrown adolescents, a perception that its founders, Sergey Brin and Larry Page, at times seem to have gleefully fostered. They have thumbed their noses at Wall Street and its preoccupation with quarterly financial results and have thrown money at things as diverse as computer eyeglasses (Google Glass, which the company is no longer aiming at consumers) and driverless cars.

When Eric Schmidt was brought on as chief executive, in 2001, Brin told The San Francisco Chronicle, “He’s going to be a bit of chaperone, providing adult supervision.” And when Schmidt stepped down 10 years later, he tweeted, “Day-to-day adult supervision no longer needed!”

That may have been premature.

Before the latest earnings announcement, Google shares had trailed the Standard & Poor’s 500 stock average over the past two years, dropping more than 7 percent compared with a gain of more than 10 percent for the S&P 500. After the recent earnings report and Porat’s debut, Google shares jumped nearly 20 percent in just a few days.

Not all of this — or even most of it — can be attributed solely to Porat’s arrival. She’s been on the job only since May. But her crisp, clear delivery, quick mastery of complicated issues and focus on “discipline in expense management,” as she put it at the earnings news conference, drew an immediate chorus of raves from analysts.

And the symbolism of appointing someone like Porat at such a senior level and having her lead the news conference has altered perceptions of Google as impulsive and undisciplined.

“Ruth has gotten off to a great start right out of the gate,” said Joseph Fath, portfolio manager of T. Rowe Price’s $45 billion Growth Stock Fund. (T. Rowe Price, the large investment firm based in Baltimore, is Google’s fourth-largest shareholder.) “There does appear to be a shift to be more cost disciplined and to focus on capital efficiency,” Fath said.

“That said, this preceded her arrival and clearly comes from Sergey, Larry and the board. But this is reinforced by their bringing in Ruth. She can parachute in and execute on that vision.”

Surprise choice

That a Wall Street veteran like Porat would join Google, which has cultivated its image as a Silicon Valley maverick, came as a surprise to many in Silicon Valley.

But Porat, 57, had an almost perfect résumé for the job if Google was maturing and looking for more credibility with investors. Not only was she a chief financial officer and former head of Morgan Stanley’s financial-institutions group, but she had worked on many technology deals as a mergers and acquisitions specialist, including Google’s initial public stock offering.

A Wharton graduate, Porat is a California native who serves on Stanford University’s board of trustees, perhaps the ultimate Silicon Valley credential.

Porat “worked her way up the ladder at Morgan Stanley beginning at a time when women were woefully underrepresented on Wall Street,” said Roger McNamee, co-founder of Elevation Partners, a private equity firm.

“I am not in the camp that believes Google needs adult supervision. What they need is an endless stream of new ideas and the discipline to allocate resources well among them. More diversity in the team will help with the first, and Ruth will be particularly helpful in the second, though Google is already more disciplined than people realize.”

The emphasis on financial discipline is what galvanized investors after the earnings call. Brian Pitz, Internet technology analyst at Jefferies & Co., wrote in a research note that the “new CFO Ruth Porat will take a more disciplined approach to expense management and capital allocation — welcome news.”

Pitz worked with Porat during the eight years he was a research analyst at Morgan Stanley, including the time when Google went public.

“A lot of people highlighted her presence on the earnings call,” he said. “I think she’s awesome. She hasn’t been there that long, and she can’t be responsible for a huge overnight shift on expenses. But people are very positive on what her being there means for future expense discipline.”

Ken Sena, consumer Internet analyst at Evercore, said Porat was sending an important message about holding the line on spending.

“The perception has long been that they throw money at things,” he said. “That’s not going to change because of one earnings report, but with her there and showing a serious commitment to some discipline, it becomes part of a story line. People are saying there’s probably a lot more that could be cut. If so, Google could be a very strong performing stock.”

Both Sena and Pitz emphasized that while investors were pleased with evidence of cost discipline and lower-than-expected capital expenditures, better-than-expected revenue and higher profit margins also drove the stock’s surge. “It’s the combination of all three that really surprised people,” Sena said.

As Porat put it, “To be clear, the priority is revenue growth, and we have a breadth of opportunity. But pursuing revenue growth is obviously not inconsistent with expense management.”

That was music to investors’ ears, and something they weren’t accustomed to hearing from Google’s top executives. Fath, the portfolio manager, noted, “This was the first margin expansion we’ve seen in over five years. That said a lot. Investors love this.”

He and Pitz, who has a buy rating on the stock, both pointed to the growing success of YouTube, which Porat cited in Google’s recent revenue growth.

“A lot of the growth is really coming from YouTube,” Pitz said. Although Google doesn’t break out results for its popular digital-video service, Porat emphasized that “growth in watch time on YouTube has accelerated and is now up over 60 percent year over year, the fastest growth rate we’ve seen in two years.”

Most investors “haven’t focused on that,” Pitz said. “We’d argue that there are more dollars offline being spent on television than there ever were in search. This could be a huge opportunity. Having Ruth is just another positive on the story.”

Meeting investors

Porat is on a global tour to meet with Google’s major investors (one of the reasons Google said Porat wasn’t available for comment), which is a welcome change from Google’s previously aloof posture.

“This is a departure based on my experience,” said T. Rowe Price’s Fath, who was scheduled to meet with her late last week. “We’re excited about it. We know her from her years at Morgan Stanley. She knows technology. She’s a good listener, and she wants to hear what shareholders want.”

What shareholders want most of all, of course, is for Google’s share price to keep going up. In that regard, Porat seems to be delivering. Google said Porat owned 46,367 Google shares as of June 13, part of a pay package expected to reach more than $30 million her first year on the job.

On July 16, before the earnings release, her shares were worth nearly $25 million. A few days later, they were worth nearly $5 million more.