In the months before joining Google last May, Ruth Porat poured over years of financial filings and research reports about the search giant to prepare her for her new role as its chief financial officer. But there was no filing that could prepare the former Morgan Stanley CFO for what she ending up working on with Google co-founder and CEO Larry Page during her first week on the job—Page’s plan to restructure Google into a Berkshire Hathaway-like holding company.
Ruth Porat’s tenure as CFO at the new corporate umbrella, Alphabet, has only just passed the one year mark, but her impact on it as a financial disciplinarian has been transformative in Wall Street’s eyes. Add to that, the company’s shares (GOOG) are up more than 30% since Porat started.
“The quality and depth of disclosures and financial information coming from Google and Alphabet has improved dramatically over the past year,” said investor Eric Sheridan, managing director of UBS’s Internet and interactive entertainment group. Sheridan said his notebooks are now filled with tidbits from earnings calls, compared with blank pages following earnings calls when Porat’s predecessor, Patrick Pichette, was the company’s financial chief before retiring last year.
It’s known that the cultures of Wall Street and technology companies are like oil and water—they don’t mix well. But Porat has managed to bridge the two worlds.
Perhaps that’s because Porat’s own roots are in Silicon Valley, where she grew up and attended Stanford University. Her father, a physicist, worked Stanford’s SLAC National Accelerator Laboratory for over 20 years. Google and its culture weren’t unfamiliar to Porat, despite her decades in Wall Street. She invested in the company prior to its initial public offering via an angel fund, and helped lead the company’s IPO in 2004 while at Morgan Stanley.
The Google Porat joined is far different than the one from a decade ago. The company still leads in online advertising, but Facebook is quickly gaining, especially on mobile. Meanwhile, Amazon is making a stiff challenge with its connected home hub, the Echo, while Apple remains a constant threat with its consumer devices and online services.
Porat has been able to woo Wall Street, and investors like Sheridan are generally happy with her influence on the company. That’s because she’s brought a much-needed level of transparency, according to Mark Mahaney, Internet analyst for RBC Capital Markets. That includes more revenue numbers from some of Google’s moonshots, as well as more openness about how the company evaluates where to invest.
For Google, the restructuring created a more investor-friendly way to separate how the company reports its financial results. Previously, Google reported its ad revenue, the bulk of its business, in combination with sales from its riskier bets such as connected thermostat business Nest, and moonshots like Google Fiber and self driving cars.
Now Google discloses revenue and profits into two categories: Google, and “Other Bets.” The “Google” bucket represents the company’s advertising business, as well as revenues from its cloud business and hardware, such as mobile operating system Android. “Other Bets” includes a mix of hardware sales from businesses like Nest, investment returns, and the small contributions from its life sciences business, Verily, and the X innovation lab.
Second, says Mahaney, Porat initiated Google’s one of Google’s first share buybacks in some time, a $5.1 billion stock purchase that helped increase the company’s earnings per share. Although $5.1 billion is just a small portion of the $75 billion in cash on Alphabet’s balance sheet, the gesture gave shareholders a little financial lift and helped to create goodwill.
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Lastly, Porat is going to extra lengths to communicate with investors by telling them where Google is placing its bets and getting the message out about that she is imposing financial discipline. Months after she joined, Porat and the investor relations team started offering analysts 15-to 30-minute briefings, called office hours, about Google’s business—a first for the company.
“She definitely spends more time interacting with investors, and going to investor conferences than previous Google CFOs,” Mahaney said. “The last two CFOs didn’t really make the Street as much of a priority.”
On earnings calls with financial analysts, you frequently hear Porat emphasize “discipline,” “efficiency,” and making “rational” decisions about investing in the company’s moonshots. This of course contrasted with little to no information Google previously released about how much it was investing in projects like self driving cars and smart contact lenses—or how much revenue could come from these ideas.
Despite her role as a disciplinarian, Porat, who is 58, isn’t afraid to admit to some of the stumbles she has faced in her own career. In her commencement speech at her graduate alma mater, University of Pennsylvania’s Wharton School, Porat recalled when she first started as an analyst at Morgan Stanley in 1987, seven weeks prior to one of the biggest stock market declines in Wall Street history. She admitted that she feared her career would soon be over.
Porat, who declined to be interviewed on the record for this article, has also been refreshingly open about some of the harder times she has faced in her own life. She was diagnosed with breast cancer in 2001, and again a few years later when her three sons were small children.
“That ghastly, terrifying experience was also a gift because that proverbial question became all too real: What happens if you are given no more than five years to live?” She recalled in her recent commencement speech. “So I set about figuring it out: What did I want to do with what could be a limited amount of time? And I realized I simply had no regrets. I hadn’t punted on my life—I hadn’t put things on hold.”
While Porat has been able to make sure investors understand that this is a new, more financially disciplined Google, her other superpower is the ability to communicate some of the complex technologies that the company is working on to the Wall Street crowd. When confronted with the challenge of being able to teach investors about artificial intelligence and machine learning, Porat often draws upon advice her father gave her.
Dr. Porat’s test was that if any physicist couldn’t clearly define what a quark was in less than 60 seconds, then they didn’t know what they were talking about. Porat has consistently used this test in the financial world and now implements it when her world at Google.
That came into play as the clock ticked down on the announcement of the corporate reorganization in August. Just days before Porat, Page, and other members of the executive team met on a Sunday to finalize details about how to pitch Alphabet to the public. One consistent theme came up in these last-minute discussions was something that the company’s founder, Page, had written in one of his annual founders letters to shareholders.
The guiding philosophy for Google, according to Page, has been “Incrementalism leads to irrelevance.” As Porat has explained in past speeches and on earnings calls, Page’s phrase means that companies need to “recognize that killing a weak idea early is valuable. If you continue to plow ahead in something that is ok, you will miss the opportunity to do something that is great.”
But Porat’s emphasis on fiscal discipline hasn’t been without some turmoil. In particular, it’s put increased pressure on leaders of the company’s moonshots to turn these bets into actual businesses that earn revenue.
Nest, acquired by Google two years ago for $3.2 billion, has been plagued by reported internal squabbles, missed sales targets, and struggles to put out new products. Meanwhile, Verily, Google’s life sciences arm, has reportedly seen a staff exodus amid a lack of focus.
Sheridan says that Porat is the best person to allocate capital among the “winning and losing projects inside Alphabet,” because she serves as the CFO of both Google and its parent, Alphabet. “She can be the advocate inside Google, as well as outside,” he said.
Aside from being the heavy, Porat’s next challenge in investor’s eyes will be increasing the company’s profit margins, said Mahaney, citing an important metric for investors. Google’s profit margins in the first quarter of 2015 were nearly 21%. Facebook, by comparison had 28% margins in the same quarter.
“The way we look at it, is whether she has imposed greater financial discipline and the answer to that is yes. But in the future she will have to consistently show margin expansion at Google, and that will be her next big challenge,” said Mahaney.
