It is common practice among listed companies to strip out stock-based compensation charges, acquisition-related charges and other non-cash charges as part of their financial information. [1] Their argument for this is generally because these charges are seen as "accounting mumbo-jumbo" by the rest of the world rather than real costs incurred in the running of the business.
I agree that stripping out marketing costs to acquire customers is harder to understand in this way and would seem to be somewhat out of the ordinary.
[1] for example ARM Holdings plc is listed on LSE and NASDAQ and shows its Q2 earnings press release with "normalised" figures quoting as being based on IFRS, adjusted for acquisition-related charges, share-based payment costs, restructuring charges, profit on disposal
and impairment of available-for-sale investments and Linaro™-related charges
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...
Groupon stripping out "discretionary online marketing expenses that are incurred primarily to acquire new subscribers” is akin to airline stripping out fuel costs as "discretionary expenses that are incurred primarily to acquire new miles".
Anyway, for example, during its last years, the well known large company i worked at, was steadily posting near neutral quarters on non-GAAP, excluding one time charges, basis. The only thing is that each quarter there would be at least a one "one time charge" that would result in the quarter being deep in red. Not surprisingly at all if one understands that the life and business in particular is just a sequence of one time events :)
(there is of course a very reasonable use of one-time charges - if company generates a profit, then good accountants would dig out some "one time charges" that would allow to decrease/avoid the profit tax)
While I agree that there are many companies that do strip out stock-based compensation charges, in my opinion their reasoning, as you put it: "accounting mumbo-jumbo" charges" I do not agree with. Share-based compensation is very much a real cost for investors.
Also, when companies do these adjustments, they should carry it consistently throughputs its full extent, i.e. by estimating the dilution
"Hid" is a strong word. They're basically trying to sell this idea:
"We won't need much marketing, nor will we be offering significant equity compensation in the future. Acquisitions are a "one-time" thing. Therefore, our long term profitability is looking pretty good."
We, as investors, are welcome to accept that reasoning or not. I think it's pretty weak. Others will disagree. But it's pretty plainly stated. (If anything in a financial report can be considered "plain").
Edit: I'd love to hear why I"m wrong about this from someone who down-voted. Am I missing something?
In addition to requiring a full reconciliation to GAAP, the SEC’s disclosure rules for nonstandard financial metrics require companies to provide “a statement disclosing the reasons why the registrant’s management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant’s financial condition and results of operations.”
Frankly, if the SEC (who makes the Keystone Kops look serious) is giving them a hard time about this non-standard financial measure, it is not simply that investors "are welcome to accept the reasoning or not"
That's a technicality. Would you be satisfied if they tacked on a statement that said, "We think this is an important metric because it shows our current profitability given the exclusion of non-recurring startup costs." or whatever version of that that the SEC finds acceptable?
Granted, I'm speculating as to their pitch as to why this is relevant, but the numbers are exceedingly clear to any investor who reads it, regardless of their spin (or lack of spin).
Do we really want financial statements packed with management's perspective on why the numbers are important? There is a balancing act there as well. The more you demand explanation, the more you invite abuse and salesmanship into what is supposedly a factual report.
Too little explanation and you get a frustratingly difficult to read report. Too much, and you may as well be reading a marketing brochure.
In the grand scheme of financial shenanigans, this one barely registers. At worst, it's a poorly explained, weak argument aimed at painting a pretty picture of the company.
Don't forget that they hid $36.2 million in stock-based compensation as part of this accounting trick.