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Tweet nothings

12 Feb 2016 By Richard Beales

Twitter lost $521 million in 2015. No, wait – it earned $277 million of profit. The first figure is according to U.S. generally accepted accounting principles, or GAAP. The second is the alternative version created by the company led by Jack Dorsey, ostensibly to make the business easier to understand.

The micro-blogging service is a big user of non-standard metrics. It even forecasts a non-GAAP share count. After $2.2 billion of revenue for 2015, the first thing mentioned in Wednesday’s earnings dispatch was more than $550 million of “adjusted EBITDA.” In this, just as in Twitter’s non-GAAP profit measure, the biggest adjustment is the exclusion of $682 million of stock-based compensation expense, a whopping 7 percent of its market value.

A battle was fought last decade to require tech companies, in particular, to include stock-related pay as an expense – because that is indeed what it is for investors who face dilution, even if it isn’t a cash outlay for a company. In a world that believes in unicorns, however, there’s still a preference on the part of bosses to exclude it, and too often analysts indulge this financial fantasy.

The likes of Twitter provide the required reconciliations to GAAP measures. And regulators do occasionally squawk over extreme adjustments. Documents filed in advance of Groupon’s 2011 initial public offering originally majored on “adjusted consolidated segment operating income,” which excluded hefty costs like marketing. The U.S. Securities and Exchange Commission balked at making ACSOI as prominent as Groupon had wanted.

In earnings reports, though, heavily money-losing companies seem unafraid to showcase their usually rosier-looking figures. An investor letter from Tesla Motors on Wednesday, for example, led with “$179 million positive core operational cash flow” in the fourth quarter. That’s itself an adjustment from a $30 million negative figure for cash flow from operating activities. At $5.3 billion last year, the company’s non-GAAP revenue was some 30 percent higher than the standardized tally.

Tech companies tend to hand employees a lot of stock, and that makes their bespoke figures some of the furthest from GAAP numbers. Enterprises in other industries also present themselves in the best possible light, though. Big banks refer to numbers that strip out the costs of legal settlements, for example, even though they have become a regular occurrence.

Generally accepted accounting principles represent an imperfect one-size-fits-all approach. Alternative metrics may sometimes boost understanding. When they’re consistently flattering, though, investors should be watching like hawks.



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