My employer is growing revenue but is not yet profitable. Management has an announced plan to get to profitability quickly.
They announced earnings per share and it was $0.05 (loss) non-GAAP and $0.25(loss) GAAP.

I know it's some legal creative accounting magic that explains the difference which one do I look at to give me a more realistic view on when the company will break even? There may come a time when non-GAAP shows a profit but GAAP is still at a loss.

What are the departures from GAAP? It could be things like depreciation, write downs of intangibles and other Non-cash transactions that may give a more clear view of profitability. On the other hand- without more information there could be all kinds of creative things in there. Need more information.

Zero way to know without looking specifics of what they are/are not including in non-gaap.

It could be legitimate. If you are MtMing a hedge, but not the underlying transaction, a non-gaap view is going to more closely represent the economics of the business.

However, it can also easily be used to cloud results so that things look rosier than they really are. Consistency is how it is being prepared over time is really important.

john2002ag said:

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However, it can also easily be used to cloud results so that things look rosier than they really are. Consistency is how it is being prepared over time is really important.

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I worked for a decent sized publicly held energy company as an accountant. All those above me, though they also worked with "accountant" or "accounting" in their job title (accounting manager, comptroller--accounting) none of them had accounting degrees, and I don't think any of them had any accounting courses.

One year end, someone in our financial group told the analysts that he thought our earnings would be around 20 cents per share (all these numbers are approximate, this was long ago, but they are within a penny or two). But we missed it hugely, in the other direction. They came in at 28 cents per share and I figured that was a good thing. Our big shots said no, you cannot miss that far in either direction and wanted to make a journal entry to knock it down to around 20 cents per share. I refused to make it, my assistant controller made it (backwards the first time). Wound up at 21 cents. I explained to them they are really sticking their neck out in a huge way, but they went ahead. Auditors questioned it but really didn't look into it. Then the next year, first quarter, the earnings were again around 28 cents (or so) but then that prior quarter entry got reversed. That made them 35 cents. So, across the two quarters, actual EPS was 56 cents per share (28 plus 28) and reported EPS was also 56 cents per share, but was 21 plus 35. While things were pretty steady (as they often were in this business) investors saw us jumping from 21 to 35. I suspect more than a little of that goes on in many companies.

In software, the add backs are most likely stock-based comp expense, amortization of any acquisition-related intangibles, and sometimes one-time severance charges.

one safe place said:

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john2002ag said:

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However, it can also easily be used to cloud results so that things look rosier than they really are. Consistency is how it is being prepared over time is really important.

---

I worked for a decent sized publicly held energy company as an accountant. All those above me, though they also worked with "accountant" or "accounting" in their job title (accounting manager, comptroller--accounting) none of them had accounting degrees, and I don't think any of them had any accounting courses.

One year end, someone in our financial group told the analysts that he thought our earnings would be around 20 cents per share (all these numbers are approximate, this was long ago, but they are within a penny or two). But we missed it hugely, in the other direction. They came in at 28 cents per share and I figured that was a good thing. Our big shots said no, you cannot miss that far in either direction and wanted to make a journal entry to knock it down to around 20 cents per share. I refused to make it, my assistant controller made it (backwards the first time). Wound up at 21 cents. I explained to them they are really sticking their neck out in a huge way, but they went ahead. Auditors questioned it but really didn't look into it. Then the next year, first quarter, the earnings were again around 28 cents (or so) but then that prior quarter entry got reversed. That made them 35 cents. So, across the two quarters, actual EPS was 56 cents per share (28 plus 28) and reported EPS was also 56 cents per share, but was 21 plus 35. While things were pretty steady (as they often were in this business) investors saw us jumping from 21 to 35. I suspect more than a little of that goes on in many companies.

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I think they call it "smoothing" of numbers.
If the results are volatile, that impacts the stock price. Uncertainty tanks the stock. So these top folks adjust things to make it more smooth and linear.

I did that at work in my daily statuses. Some days I had nothing to report. Some days I had a lot because many projects got results that took days/weeks to do. So I hid some information when there was a surplus and reported in days of scarcity to smooth things out so my idiot boss at the time wouldn't freak out that I was not doing anything. This was the early days of remote in 2020 and I worked for a large machinery company that EVERYONE has heard of. Full of dunderheads in their high-tech division so I quit.

infinity ag said:

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My employer is growing revenue but is not yet profitable. Management has an announced plan to get to profitability quickly. They announced earnings per share and it was $0.05 (loss) non-GAAP and $0.25(loss) GAAP.

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Was working as a CFO for a PE startup in the roofing industry a while back. Our CEO called an all hands meeting to discuss profitability and how to improve it. He said no idea was off the table. Since our gross margins were negative at the time, I suggested we cease operations (kinda joking, kinda not). Sometimes when they say all options are on the table, they don't mean it

I'd look at cashflows if you have access. Depending on where y'all are positioned on working capital finance, this new interest rate environment could be devastating if you're not profitable.

Sims said:

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infinity ag said:

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My employer is growing revenue but is not yet profitable. Management has an announced plan to get to profitability quickly. They announced earnings per share and it was $0.05 (loss) non-GAAP and $0.25(loss) GAAP.

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Was working as a CFO for a PE startup in the roofing industry a while back. Our CEO called an all hands meeting to discuss profitability and how to improve it. He said no idea was off the table. Since our gross margins were negative at the time, I suggested we cease operations (kinda joking, kinda not). Sometimes when they say all options are on the table, they don't mean it

I'd look at cashflows if you have access. Depending on where y'all are positioned on working capital finance, this new interest rate environment could be devastating if you're not profitable.

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I think I neglected to say earlier, that it is a Public Company. All data that they reveal is available to everyone and I cannot get any more than what they announce.

But I will take a look at the cashflows. I don't mean to say they are doing anything illegal. I am almost 100% sure they are fully legal and compliant as everything is announced and public. I am just confused about this process we have of announcing 2 EPS numbers GAAP and non GAAP.

I think it was mentioned above, but real red flags should go off when you see subtle changes in calculation. Especially for anything important like revenue or major expenses.

infinity ag said:

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one safe place said:

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john2002ag said:

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However, it can also easily be used to cloud results so that things look rosier than they really are. Consistency is how it is being prepared over time is really important.

---

I worked for a decent sized publicly held energy company as an accountant. All those above me, though they also worked with "accountant" or "accounting" in their job title (accounting manager, comptroller--accounting) none of them had accounting degrees, and I don't think any of them had any accounting courses.

One year end, someone in our financial group told the analysts that he thought our earnings would be around 20 cents per share (all these numbers are approximate, this was long ago, but they are within a penny or two). But we missed it hugely, in the other direction. They came in at 28 cents per share and I figured that was a good thing. Our big shots said no, you cannot miss that far in either direction and wanted to make a journal entry to knock it down to around 20 cents per share. I refused to make it, my assistant controller made it (backwards the first time). Wound up at 21 cents. I explained to them they are really sticking their neck out in a huge way, but they went ahead. Auditors questioned it but really didn't look into it. Then the next year, first quarter, the earnings were again around 28 cents (or so) but then that prior quarter entry got reversed. That made them 35 cents. So, across the two quarters, actual EPS was 56 cents per share (28 plus 28) and reported EPS was also 56 cents per share, but was 21 plus 35. While things were pretty steady (as they often were in this business) investors saw us jumping from 21 to 35. I suspect more than a little of that goes on in many companies.

---

I think they call it "smoothing" of numbers.
If the results are volatile, that impacts the stock price. Uncertainty tanks the stock. So these top folks adjust things to make it more smooth and linear.

I did that at work in my daily statuses. Some days I had nothing to report. Some days I had a lot because many projects got results that took days/weeks to do. So I hid some information when there was a surplus and reported in days of scarcity to smooth things out so my idiot boss at the time wouldn't freak out that I was not doing anything. This was the early days of remote in 2020 and I worked for a large machinery company that EVERYONE has heard of. Full of dunderheads in their high-tech division so I quit.

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I thought it was called "Jack Welching"?

It could be:
Tax-basis
Cash
Modified cash basis

Need more info.

infinity ag said:

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one safe place said:

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john2002ag said:

---

However, it can also easily be used to cloud results so that things look rosier than they really are. Consistency is how it is being prepared over time is really important.

---

I worked for a decent sized publicly held energy company as an accountant. All those above me, though they also worked with "accountant" or "accounting" in their job title (accounting manager, comptroller--accounting) none of them had accounting degrees, and I don't think any of them had any accounting courses.

One year end, someone in our financial group told the analysts that he thought our earnings would be around 20 cents per share (all these numbers are approximate, this was long ago, but they are within a penny or two). But we missed it hugely, in the other direction. They came in at 28 cents per share and I figured that was a good thing. Our big shots said no, you cannot miss that far in either direction and wanted to make a journal entry to knock it down to around 20 cents per share. I refused to make it, my assistant controller made it (backwards the first time). Wound up at 21 cents. I explained to them they are really sticking their neck out in a huge way, but they went ahead. Auditors questioned it but really didn't look into it. Then the next year, first quarter, the earnings were again around 28 cents (or so) but then that prior quarter entry got reversed. That made them 35 cents. So, across the two quarters, actual EPS was 56 cents per share (28 plus 28) and reported EPS was also 56 cents per share, but was 21 plus 35. While things were pretty steady (as they often were in this business) investors saw us jumping from 21 to 35. I suspect more than a little of that goes on in many companies.

---

I think they call it "smoothing" of numbers.
If the results are volatile, that impacts the stock price. Uncertainty tanks the stock. So these top folks adjust things to make it more smooth and linear.

I did that at work in my daily statuses. Some days I had nothing to report. Some days I had a lot because many projects got results that took days/weeks to do. So I hid some information when there was a surplus and reported in days of scarcity to smooth things out so my idiot boss at the time wouldn't freak out that I was not doing anything. This was the early days of remote in 2020 and I worked for a large machinery company that EVERYONE has heard of. Full of dunderheads in their high-tech division so I quit.

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It's called fraud if you are doing it in your SEC filing as your official GAAP results. There is more leeway in non-gaap metrics because there isn't any official rules there, but they should at least be consistent or you could get in trouble here as well.

Since you're a software company I bet the difference is between capitalizing development costs (labor) vs not-capitalizing it.

Capitalizing could be GAAP and they say expensing is non-GAAP… now this could be "loss" based on EBITDA since that capitalized cost gets depreciated or amortized below the line.

As someone else said, it could also be a lot of add backs for non-recurring costs, non-cash stock based comp expense, etc. who knows honestly.