LOL, divining pro-forma earnings...
Tech Firms Hide Payroll Taxes
On Employees' Stock Options
By ROBERT MCGOUGH and MYLENE MANGALINDAN
Staff Reporters of THE WALL STREET JOURNAL
Nobody likes paying taxes, but some tech companies apparently like reporting them to their shareholders even less.
In their quarterly earnings announcements, businesses such as BEA Systems, Cisco Systems, InfoSpace, Qualcomm and Yahoo! are playing up a net-income figure that ignores the payroll taxes they owe when employees exercise stock options -- as if the taxes had never been incurred.
What a concept! In today's stock market, the companies are under heavy pressure to look as profitable as they can. By stressing an earnings figure that excludes the expense of the payroll taxes, they do look more profitable.
How are the companies able to do this? Thank Silicon Valley's brilliant innovations in the field of pro-forma earnings. At the top of the earnings releases that technology companies publish, they announce their pro-forma earnings. In the pro-forma number, companies get to include -- or exclude -- just about any revenue or expense that they want. The huge body of accounting rules only applies to the dreary official-income figure that shows up later in the news releases. Inevitably, pro-forma earnings are higher than this "generally accepted accounting principles" number reported lower.
Some expenses excluded from pro-forma earnings, such as costs associated with acquisitions, seem reasonable to exclude. They arguably aren't recurring, so their exclusion gives investors a better idea of how the day-to-day business is faring. But payroll taxes? Aren't they a cost of doing business?
To be sure, the payroll tax represents only a small portion of income for the companies that exclude it from the pro-forma figure. Still, nowadays, a penny in per-share income can have a big effect on a stock price. And some accounting experts and investors say the disappearing payroll tax is yet another example of the kind of wacky accounting that shows up in pro -forma income.
"When you're talking about e-businesses, they all come up with their own cookbook for what the earnings should be," complains Jack Ciesielski, publisher of the Analyst's Accounting Observer, a Baltimore newsletter. "It's kind of ludicrous."
Not at all, the companies insist. They argue that leaving out the payroll taxes on options actually makes their business returns clearer to investors. "We're just trying to give people a better idea of our operating results," says Dick Grannis, vice president and treasurer of Qualcomm, a wireless-phone-technology firm. "That's what any pro-forma earnings tries to do." |
