Pro Forma: Only the Good News

Internet companies bent on making the best of their financial results are increasingly trumpeting pro forma profitability, rather than the net income or losses that regulators say provide a better picture of a companys performance.

Internet companies think that pro forma results — which are operating results excluding one-time charges for items such as layoffs and restructuring charges, bad investments, acquisition costs, etc. — offer investors better insight into just how the company is performing — excluding those special charges.

Regulators dont think so.

In a March speech, Lynn Turner, the Securities and Exchange Commissions chief accountant, attacked company disclosures that appeared to "turn straw into gold." Turner calls many of the pro forma earnings reports "EBS, or everything but the bad stuff."

Some cases in point are online travel agencies Expedia and Travelocity.com, which both reached pro forma profitability earlier this year, and e-tailing giant Amazon.com, which projects pro forma profitability in the fourth quarter.

Amazon reported a pro forma operating loss of $49 million in the first quarter. To make things even more confusing, it also reported a "pro forma net" loss of $76 million, or 21 cents per share.

But in its generally accepted accounting principles (GAAP) filings, Amazon actually had a net loss of $234 million, or 66 cents per share. Among the items excluded from its pro forma operating losses were a net interest expense of $24 million and a $114 million charge for restructuring costs, such as closing a warehouse.

"The analysts community estimates our financial outlook based on pro forma results," said Amazon spokesman Bill Curry. "Its the way we think of our business, because many of these are one-time charges."

Many Wall Street analysts have, in fact, adopted pro forma results as the primary gauge of reporting how an Internet company is doing, according to earnings tracking service Thomson Financial/First Call.

Expedia, based in Bellevue, Wash., reported pro forma profit of $4.4 million, or 9 cents per share, for its third quarter ended April 30. In reality, the company lost $17.6 million, or 37 cents per share, in the quarter.

But Expedia emphasized that it would have turned a profit, were it not for the cost of acquiring two competitors last year and providing $114 million worth of stock options to former Microsoft employees who joined Expedia.

Travelocity reported net profit, excluding special items, of $618,000, or 3 cents per share, for the first quarter. In reality, it reported a net loss of $22.1 million, or $1.14 per share, for the quarter.

"We never break out financials into pro forma without showing our GAAP results," said Ramesh Punwani, chief financial officer at Travelocity. "Youve got to have both. Sadly, the average investor is not savvy enough to know the difference in many cases."