I'd like to connect with you on non-GAAP accounting
You probably heard Microsoft's announcement that it was acquiring LinkedIn. One of the possible reasons that LinkedIn decided to sell is explored in this Andrew Ross Sorkin column from earlier in the week. You see, LinkedIn's love of stock compensation means that it also loves not including that compensation in its EBITDA calculations:
[D]espite all the headlines about growth and profits, LinkedIn has been a money-losing operation for the last two years.
You wouldn’t know that if you only glanced at LinkedIn’s news releases. That’s because LinkedIn steers investors to focus on what’s known as its adjusted Ebitda, or non-GAAP earnings. The company purposely strips out the cost of stock-based compensation, which has the effect of turning losses into gains. LinkedIn paid out $510 million in stock-based compensation last year; over the last two years, that stock-based compensation represented a whopping 96 percent of operating income, or 16 percent of revenue, according to [Mark] Mahaney [an RBC analyst]. Companies like Google, Amazon and Facebook paid out about 15 percent of operating income, or well under 10 percent of revenue.
LinkedIn justifies the practice by saying that stock-based compensation “is noncash in nature” and that excluding it from its earnings calculation provides “meaningful supplemental information regarding operational performance and liquidity.”
Prior to Microsoft's announcement, LinkedIn's stock price had been on quite a downslide and because the company compensates with stock, it could've seen a big exodus of employees. Which makes sense because the market already had made up its mind about LinkedIn's accounting:
[Mark] Mahaney, the RBC analyst, said the use of so much stock-based compensation was a negative signal. “There are a variety of ways to look at this issue, but our general bias is that the lower the dependence on stock-based compensation, the higher the quality of the P&L,” he wrote in a report in April, using shorthand for the income statement.
LinkedIn, Twitter, Yahoo and Alibaba, which “have the most dependence on stock-based compensation,” also have results “of relatively lower quality,” Mr. Mahaney said.
Here's what's interesting. Sorkin thinks that if LinkedIn would've included stock comp expense in its press releases, investors would've seen that they were losing money and the stock would've gone down. But by excluding stock compensation from its EBITDA calculations, LinkedIn helped investors identify their company as one with lower quality financial reporting and the stock went down anyway. Would investors have made different decisions if LinkedIn had reported EBITDA instead of adjusted EBITDA? Because Facebook and other companies recently stopped excluding stock compensation from their EBITDA reporting, Sorkin thinks so:
It is not hard to believe that LinkedIn, barring this deal with Microsoft, would have soon been using the more realistic version of its earnings — and, in so doing, reporting more losses. The company certainly deserves credit for building a global network with 430 million users and becoming a household name. But absent this accounting method, uglier headlines would have dragged down the stock price even further, along with the morale of all those employees whose incomes were dependent on it.
I'm not so sure. If you believe markets are efficient, then wasn't LinkedIn's stock price already appropriate? Does ditching one non-GAAP metric (adjusted EBITDA) for another (plain ol' EBITDA) really give investors better information? It seems to me that the market already knew that LinkedIn liked to paint a rosier picture than its peers and adjusted accordingly. And then, Microsoft to the rescue!
Elsewhere in LinkedSoft: LinkedIn’s Autonomy Under Microsoft May Not Endure
There's no joy in Mud…er…Bentonville (and elsewhere):
About 500 stores, mostly on the West Coast, are dropping positions that cover accounting and invoicing for individual stores, said Mark Ibbotson, executive vice president for central operations at Wal-Mart U.S.
A Wal-Mart store typically has about three employees in those roles, usually higher-paid hourly workers who count cash or manage invoices for companies that bring products directly to stores, not through Wal-Mart’s warehouses.
Instead, invoicing will be handled by a central office at Wal-Mart’s Bentonville, Ark., headquarters and money will be counted at each store by a “cash recycler” machine, Mr. Ibbotson said. The current system is dated and error-prone, he said, and “we really want to pull our workforce onto the floor.”
Even if these accounting jobs don't demand high skills, I'm sure the people in them would rather keep doing a back office job than, say, help the customers of Walmart:
The affected workers have been offered other consumer-facing store positions, though they aren’t guaranteed the same hourly wage, [Mark] Ibbotson [EVP of central operations] said. Wal-Mart says any retained worker taking a step-down in pay in their new job will make $17.55 an hour. Wal-Mart expects less than 1% of the employees affected to leave the company, Mr. Ibbotson said.
Americans hate taxes
Especially in McHenry County, Illinois. Earlier in the week, we mentioned the obnoxious guy who decided to pay his $5,734.18 property taxes in $1 bills (and two dimes). Turns out, he wasn't the only obnoxious guy to enter the McHenry County treasurer's office that day:
Jeff McGrath and Dan Aylward paid thousands of dollars of real estate taxes with $1 bills at the county treasurer's office and vowed to do so again in September and every due date afterward until the taxes stop increasing.
McGrath, who lives in Woodstock, where he also owns an automotive business, marched into the treasurer's office Monday, the due date to pay the first installment of 2015 real estate taxes. He carried in two clear plastic bags. One, he said, was filled with $9,995.66 in singles (and some coins) along with a check for $1,456 to pay his business real estate tax bill of $11,451.
The second bag was filled with $5,757.44 in singles and coins to pay his residential tax, he said.
He said he did that and will do it again Sept. 13 when the second installment is due to make one "plain and simple point."
"We are fed up with getting nickeled and dimed," McGrath said.
To be fair, Illinois does have some of the highest property taxes in the nation. But as Illinois residents, Mr. McGrath and Mr. Aylward are close to the average. A recent report in the Chicago Tribune estimated the average Illinois property tax bill at $5,340.
Elsewhere in wasting valuable time: House Committee Votes to Censure U.S. IRS Chief Koskinen
Previously, on Going Concern…
Leona May gave us a white-collar crime roundup and I reminded everyone that voting on the AICPA-CIMA merger ends today. In Open Items: someone with an MBA is now in law school and wants to know where a Big 4 firm might place them
In other news:
- EY names new OC OMP.
- Corporate Clients Push Back After Law Firms Hike Starting Salaries
- Mark Zuckerberg: Not a lizard.
- The PCAOB on the Auditor’s Reporting Model: Great Progress and More To Do
- Polite Googling.
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