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Concur Technologies Inc. (NASDAQ:CNQR) is a company in the business of providing integrated travel and expense management solutions for companies of all industries, sizes and geographies. I previously wrote about the company on December 20, 2011. When Concur reports EPS it seems to have an aversion to expending much effort focusing on its GAAP EPS.

Concur just reported its 1st-quarter EPS and in its report, it continued its propensity to divert attention away from its true GAAP EPS and instead focus on "adjusted" non-GAAP net income. Here is an excerpt from the earnings release in the SEC filing:

Financial Highlights

  • Total revenue was $100.4 million for the first quarter of fiscal 2012, up 25% compared with the year-ago quarter, and up 5% sequentially.
  • Non-GAAP pre-tax income was $17.9 million, or $0.32 per share, for the first quarter of fiscal 2012, compared with $16.2 million, or $0.30 per share, for the year-ago quarter. Please refer to "About Concur's Non-GAAP Financial Measures" below for an explanation of our non-GAAP financial measures used in this press release.
  • Non-GAAP operating margin was 20% for the first quarter of fiscal 2012, compared with 22% for the year-ago quarter.
  • GAAP cash flows from operations were ahead of expectations at $6.4 million for the first quarter of fiscal 2012.
  • GAAP net loss was $0.9 million, or $0.02 per share, for the first quarter of fiscal 2012, compared with net income of $3.7 million, or $0.07 per share, for the year-ago quarter.

So while Non-GAAP EPS for the quarter rose by 6.7%, GAAP EPS actually declined and went from a gain in previous year to a loss this quarter. Interestingly, the term "Non-GAAP" appears 76 times in the SEC filing. Nonetheless, the stock price traded up as much as 15% on the release. Could this market reaction indicate that those non-GAAP adjustments make sense? Well, let's take a look.

This is how CNQR turned GAAP EPS of $-.02 into positive Non-GAAP EPS of $.32:

CNQR GAAP to Non-GAAP

Now let's examine the first three items qualitatively:

Share-based Compensation - $.21

This item is the largest adjustment that Concur uses to turn a $.02 loss into a $.32 gain and it is certainly notable that it increased by 75% over the previous year. Can anyone come up with a valid reason why share-based compensation is added back to GAAP EPS? Isn't compensation still an expense whether it's paid in cash or stock? Doesn't it still dilute shareholder equity? If one accepts the logic of adding this back, then I have an idea that can be used by all companies to increase non-GAAP EPS even more. How about paying the rent with stock? What about office supplies, etc.? Adding back share-based compensation is a silly concept and it is stunning how any Wall Street analyst would accept this adjustment and use it in their EPS projections.

Here is Concor's side of the story:

Concur's non-GAAP financial measures exclude share-based compensation, which consist of expenses for restricted stock units ("RSU"). Concur excludes these expenses from its non-GAAP financial measures primarily because they are non-cash expenses that it does not consider part of ongoing operating results when assessing the performance of our business, and the exclusion of these expenses facilitates the comparison of results and business outlook for future periods with results for prior periods.

Amortization of Intangibles - $.07

This is simply an accounting convention that spreads the costs of certain purchased intangible assets over the periods that benefit from their purchases. These costs likely involved the deployment of cash up front and there is no logical reason to add them back. They are REAL expenses.

Once again here is what Concur has to say about them:

Concur's non-GAAP financial measures exclude share-based compensation, which consist of expenses for restricted stock units ("RSU"). Concur excludes these expenses from its non-GAAP financial measures primarily because they are non-cash expenses that it does not consider part of ongoing operating results when assessing the performance of our business, and the exclusion of these expenses facilitates the comparison of results and business outlook for future periods with results for prior periods.

Accretion of Discount Note: - $.05

This is another no-brainer. If a company issues a note for $950 but owes $1,000 at maturity, is the $50 you must pay at maturity an expense? Of course it is. What happens if you issue a zero coupon note at $500 for five years? You'll have no annual cash interest expense but does that mean you should add back all your true financing costs of $100 per year back to GAAP EPS? Of course not!

See if you can follow Concur's logic on this:

In accordance with GAAP, interest expense on the senior convertible notes includes the accretion of the discount, which is a non-cash expense that Concur does not consider part of ongoing operating results when assessing the performance of our business.

Concur is following all its requirements in showing the reconciliation of GAAP to Non-GAAP EPS in its SEC filings. However, it is the analyst's job to look through the numbers, ask questions and not blindly accept a picture painted by management. GAAP stands for Generally Accepted Accounting Principles and the reason they exist is obvious.

In the release, CNQR projected fiscal 2012 non-GAAP pre-tax income per share of $1.27, giving it a hefty forward P/E of around 45 on an inherently flawed number. The GAAP based P/E ratio that investors should focus on is a multiple of that. Unfortunately, this number is not easily available because Wall Street follows the company's logic in making its estimates. Concur may not be the only company boosting EPS with these kind of adjustments. However, if you invest in this stock you should understand the numbers. On a GAAP basis, Concur lost money this quarter.

Disclosure: I am short CNQR.

Disclaimer: These are the personal views of Wall Street Titan and should not be relied upon for your investment decisions. All investors should always do their own due diligence.

Source: Concur Technologies: Will The Real EPS Numbers Please Stand Up