Non-GAAP Results: More Distorted Than You Think

 |  Includes: ABX, CRM, FTR, GCI, LNKD, TSLA, TWTR
by: YCharts

By Dee Gill

Many companies find that they can make quarterly earnings reports look a lot prettier by publishing homemade metrics alongside required financial results. A look at a few of those non-GAAP results this earnings season shows just how creative these metrics can be.

Auto maker Tesla Motors (NASDAQ:TSLA) managed one of the bigger non-GAAP successes this earnings season with its unusual customized metric. Tesla’s non-GAAP earnings include all the fees from the life of a car lease up front, rather than the amount the lessee has actually paid. For the company, it’s a particularly brilliant use of the practice. Unlike the more commonly used stock compensation accommodations in non-GAAP reporting, Tesla’s formula jacks the revenue line as well as the income report. Tesla latest quarter showed non-GAAP revenue up 9% from the last quarter to $602.9 million. GAAP revenue was only up 6% to $431.3 million. With its non-GAAP metric, Tesla also created $15.9 million in non-GAAP net income last quarter. Officially, it lost $38.5 million.

TSLA Net Income (Quarterly) Chart
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TSLA Net Income (Quarterly) data by YCharts

Stripping out the cost of stock-based compensation and the amortization of acquired assets is a popular way to create a nicer results, and the practice has grown rampant in the tech sector. That’s how LinkedIn (NYSE:LNKD) reported non-GAAP net income of $46.8 million for the third quarter, a whopping 86% higher than a year earlier. Those expenses actually ate up all of LinkedIn’s profits last quarter. Officially, LinkedIn had a $3.4 million loss for the quarter.

LNKD Net Income (Quarterly) Chart
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LNKD Net Income (Quarterly) data by YCharts

Media company Gannett (NYSE:GCI) has devised a non-GAAP metric with a sink full of stripped out expenses, including, in its own words: workforce restructuring charges, transformation costs, pension settlement charges, a loss related to a change in control and sale of interests in a business, charges for accelerated depreciation recognized by an equity method investee, non-cash impairment charges, a currency-related loss recognized in other non-operating items and certain credits to its income tax provision. All that gave Gannett Non-GAAP net income of $117.6 million, compared to GAAP income of $97.5 million.

GCI Net Income (Quarterly) Chart
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GCI Net Income (Quarterly) data by YCharts

Many, many other companies prefer to point investors toward non-GAAP results. Barrick Gold (NYSE:ABX) headlined non-GAAP earnings that were almost triple the reportable amount. Frontier Communications (NYSE:FTR) took out pension settlement costs, severance costs and several other expenses to bring up its GAAP net income of $35.4 million to a non-GAAP $56.5 million. (NYSE:CRM) and dozens of other growing tech companies like it have turned reportable losses into non-GAAP profits. Twitter’s (NYSE:TWTR) IPO information was covered with non-GAAP numbers.

ABX Chart
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ABX data by YCharts

There’s nothing illicit in publishing non-GAAP numbers as long as they are touted alongside regulated results. The danger for investors is getting lulled by those arbitrary metrics and forgetting to scrutinize the real money earned. The expenses backed out for non-GAAP numbers are, in fact, expenses, and investors shouldn’t be duped into ignoring them.

YCharts has discussed the problems with non-GAAP reporting many times, including in several pieces about the practice at here, here and here.

Non-GAAP metrics usually make earnings look better than they really are, as Gretchen Mortgenson detailed in a New York Times column Nov. 9. Because they are simply a combination of whatever financial details management chooses, getting the investment community to focus on them gives companies an easier way to meet expectations. A study out of University of Southern California this month found that companies are 20% more likely to meet or beat analyst forecasts at companies that publish the quite massage-able non-GAAP numbers.

As investors, we welcome any additional numbers a company wants to disclose. In fact, the details in non-GAAP earnings can be extremely useful to investors involved in company analysis. But we also know that those customized compilations can be distractions from uglier results. It’s necessary to dissect the components of a non-GAAP result to determine if it’s a useful measure of the company’s health, or simply lipstick on a pig.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.