When Alphabet posts its first quarter results on Monday, investors should be prepared to see three changes to how it reports its earnings.
The changes, which Alphabet announced earlier this month, will likely lead to a decrease in revenue in Alphabet's "Other Bets" category and more volatility for its "other income and expenses," while also providing a new way to measure the success of its ads on third-party websites.
Here's an explanation of the three changes:
Nest no longer an "Other Bet"
Alphabet announced plans in February to roll its stand-alone smart home unit, Nest, back into Google's hardware team because of the overlap of their work.
Alphabet has previously highlighted Nest as one of the few "Other Bets" that generates considerable revenue, alongside health-care company Verily and internet service provider Fiber. So now that it's back in the Google fold, "Other Bets" revenue could see a dip.
Instead, Nest's revenue will now be reported as part of Google's "other revenues" category, which includes its cloud business, Play store revenues and hardware sales. Likewise, its operating income or loss will move to Google's balance sheet.
Alphabet's consolidated financial results will not be affected by this change, but by studying the change across categories, investors may be able to get a better sense of how much revenue Nest has been reeling in.
Unrealized gains or losses from investments showing up on the income statement
The second significant change to Alphabet's balance sheet comes because of a new accounting standard for equity security investments.
Under the new rule, called Accounting Standards Update 2016-01, Alphabet has to report the unrealized gains and losses from its investments on its income statement.
For example, Alphabet bought a stake in both ride-hailing start-up Uber and augmented reality start-up Magic Leap. Previously, it only had to list the price of that investment on its income statement during the quarter it happened. Beyond that, it would only have had to report gains or losses from those investments in certain circumstances, such as selling its stake or concluding that the investment was worthless.
Now, Alphabet will have to value its stake in its investments every quarter and report those numbers on its income statement. So if Uber's valuation has gone up since Google invested (it has), Alphabet will now include that increase in value of its investment as income.
The goal of the rule is to provide investors with more clarity around how well a company's investments are doing, although critics say it could unnecessarily complicate earnings reports and be inconsistent between companies (two Uber investors might value it differently).
Alphabet, for its part, warns of "increased volatility in OI&E" (other income and expense) on the income statement and will likely remind investors on its earnings call that the income statement changes won't actually reflect any changes to its core business.
"Market transactions for marketable equity securities occur daily in the stock market; transactions for non-marketable equity securities occur sporadically and are generally not within our control," Alphabet says.
Here's a chart Alphabet created to summarize how the new rule will change its accounting:
See ya later, CPC
Finally, Alphabet is changing its monetization metrics for Google's Network properties from clicks to impressions.
Google reports its advertising revenue in two buckets:
— Google properties (revenue from Google search, Gmail, YouTube, and others).
— Google Network Members' properties (revenue from third-party sites that use its AdMob, AdSense or DoubleClick ad products to put ads on their websites).
Previously, it has also included the percentage change in paid clicks (how many times people clicked its ads) and cost-per-click (how much it can charge for the ads) for both categories. Now, however, it's switching the Network properties' metric to the percentage change in impressions (how often its ads are viewed) and cost-per-impression (how much it can charge for those views).
That metric change reflects how most advertisers are already buying ads.
To provide a basis for comparison, Alphabet's Q1 earnings will include the percentage change in impressions and cost-per-impressions for Network revenues for all quarters of 2017.
Paid clicks and CPC will also be included for the last time.
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