Ama­zon and Face­book Now Mind the GAAP

Earn­ings ▶ At a mo­ment of strength, a switch to less fa­vor­able ac­count­ing ▶ “There’s no bet­ter time to change your be­hav­ior”

Bloomberg Businessweek (North America) - - Technology -

For more than a decade, many of the largest tech­nol­ogy com­pa­nies have danced around the cost of pay­ing work­ers, re­leas­ing profit num­bers that don’t ac­count for the heaps of stock they dole out. In­stead of con­form­ing to the U.S. stan­dards known as Gen­er­ally Ac­cepted Ac­count­ing Prin­ci­ples (GAAP), which in­clude eq­uity-based pay costs, roughly four in five of the 70 tech com­pa­nies in the S&P 500 index use hand­picked profit mea­sures that make their earn­ings look bet­ter, ac­cord­ing to data com­piled by Bloomberg for their lat­est fis­cal years. The NON-GAAP mea­sures raised the busi­nesses’ col­lec­tive earn­ings 23 per­cent, to $239 bil­lion.

In their lat­est quar­terly earn­ings re­ports, Ama­ and Face­book stopped elid­ing their stock-based compensati­on, join­ing ex­cep­tions such as Net­flix and In­tel. “We view it as a real ex­pense,” Face­book Chief Fi­nan­cial Of­fi­cer David Wehner said on his April 27 earn­ings call. Un­like in pre­vi­ous re­ports, the CFO fo­cused on GAAP num­bers and said he would do the same on fu­ture calls. A day later, Ama­zon re­ported stock-based pay for its dif­fer­ent busi­nesses for the first time.

Dur­ing the first dot- com boom, fast- grow­ing tech star­tups ar­gued that the op­tion grants they were hand­ing em­ploy­ees were too dif­fi­cult to re­li­ably value for the pur­poses of quar­terly re­ports. That’s still the de­fault po­si­tion in an era when most eq­uity grants come in the form of re­stricted stock with a straight­for­ward vest­ing sched­ule. The re­sult: Some se­ri­ous money is fac­tored out of the bot­tom-line re­port­ing. The av­er­age pub­lic U.S. com­pany has a price- earn­ings ra­tio of 17—mean­ing its stock price is 17 times greater than its es­ti­mated 2016 earn­ings per share— or 18, when you count stock compensati­on, ac­cord­ing to San­ford C. Bern­stein. Face­book’s p- e’s are 35 and 50; Ama­zon’s are 63 and 122.

So why make the change now? “If you can act from a po­si­tion of strength, which Ama­zon and Face­book clearly are, there’s no bet­ter time to change your be­hav­ior,” says Denny Fish, a port­fo­lio man­ager at in­vest­ment firm Janus Cap­i­tal Group. Face­book just re­ported one of its best quar­ters, and Ama­zon nearly dou­bled an­a­lysts’ al­ready bullish profit es­ti­mates. “They look more re­spon­si­ble, and it makes them ac­count­able for how they is­sue stock for compensati­on,” says Fish.

While in­vestors rarely pun­ish the in­dus­try for its cre­ative ac­count­ing, Face­book’s and Ama­zon’s shifts also fol­low mount­ing crit­i­cism about overuse of NON-GAAP num­bers. In

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