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Investors punish Google for surprise, bad earnings

(MoneyWatch) Traders took shares of Google (GOOG) to the woodshed today after the company released bad news in an even uglier fashion.

Google earnings not only fell sharply, but also were mistakenly released to the public shortly after noon instead of after the close of trading. With no time to digest the news, traders hit the sell button, and by the time Nasdaq halted trading the stock had tumbled 9 percent. It recovered slightly after trading resumed at 3:20 p.m. to close down 8 percent, rising slightly after hours.

Although Google's revenue was up year-over-year, net profit was down $1.80 a share. The reason for the profit drop was two-fold. First, and most worryingly, advertising prices were down, putting pressure on Google's core business. Second, Google's May acquisition of Motorola Mobility not only brought a hardware business and extensive set of patents for litigation wars with Apple (AAPL) and Microsoft (MSFT), but also a history of extensive losses.

Perhaps not surprisingly, Google accentuated the positive in a statement released after today's surprise earnings announcement. "We had a strong quarter," said CEO Larry Page. "Revenue was up 45 percent year-on-year, and, at just 14-years-old we cleared our first $14 billion revenue quarter. I am also really excited about the progress we're making creating a beautifully simple, intuitive Google experience across all devices."

In a conference call with investors after the close of trading, Page apologized for the earnings release snafu. Google blamed the mistake on R.R. Donnelley (RRD), the company that prints its financial documents. R.R. Donnelley said it had launched an investigation into the error.

While Google was just as surprised as traders by the timing of the announcement, the company could have better prepared investors for its downbeat financial results. The markets love two things: profitability and predictability. The rule of thumb among experienced executives and investor relations professionals is to get bad news out as soon as possible. When sales, profit or other significant numbers are expected to land short of target, companies that are deft at working with investors know how to send out smoke signals to lessen the damage.

However, Google is a tightly controlled company, with the combination of Page, co-founder Sergey Brin and chairman Eric Schmidt having enough voting power to enforce their managerial views. Those views have included not offering guidance to analysts.

In this case, Google appears to have paid a price for that approach. Google executives would have known about the impact of falling ad prices and the Motorola losses on its bottom line. And the company should have known that investors would react badly, as they'd be concerned that the Motorola purchase might have been a mistake, particularly given the advertising softness.

As is its policy, Google said nothing to investors. But there comes a time when publicly held companies must consider if they're being responsive enough to shareholders.