Mind the GAAP with tech firms

NO stock is more divisive than a tech one, it seems, where two investors can look at the same set of numbers and come to at least two different conclusions. On Tuesday, two different numbers from Twitter's second-quarter results fought for investor attention: its net loss of US$145 million based on generally accepted accounting principles (GAAP), versus its non-GAAP net income of US$14.6 million that came about when a hefty stock-based compensation expense was excluded. Non-GAAP appeared to triumph over GAAP. Twitter's share price soared 29 per cent after hours, that day.

Non-GAAP metrics are not new or uncommon, but tech firms tend to go the furthest with them. Some exclude large stock-based compensation expenses. Others exclude acquisition-related ones. The gulf between GAAP and non-GAAP realities can be significant.

One study found that 56 tech firms reported non-GAAP income that was 23 per cent higher than their GAAP earnings on average, in 2011 and 2012. Investors also tend to give non-GAAP numbers more credence than usual because of all the unknowns that loom on a tech firm's horizon. On top of that, today's tech firms have popularised non-financial metrics that have evolved into key measures.