I'm Not Going There, Rosetta Stone!

I'm all for non-GAAP accounting when it's justified. For example, NVIDIA (Nasdaq: NVDA  ) suffered from abnormally large inventory write-offs in the last quarter, and Advanced Micro Devices (NYSE: AMD  ) still gets that fat Intel (Nasdaq: INTC  ) settlement included in its trailing-12-month results. ValueClick (Nasdaq: VCLK  ) got a nice present from Uncle Sam last quarter, without which its results wouldn't look nearly as impressive. In cases like these, it's only fair to the company and helpful for investors to back out the effects of one-time events so you can compare true operating results on an apples-to-apples-ish basis. Under the right circumstances, it makes sense to step outside the usual accounting rulebook.

But then there's the other kind of pro forma adjustment where companies seems to pick and choose whatever items they want to exclude just so they can look good in the earnings spotlight. Enter language-learning expert Rosetta Stone (NYSE: RST  ) .

First of all, Rosetta Stone wants us to forget about stock-based compensation expenses. Fair enough -- everybody else is doing it so why can't Rosetta? I'm not so forgiving about the "IPO-related compensation" -- yes, the IPO was a one-time event, but if you handed out stock-based bonuses around that time, why not own up to the costs thereof?

Oh, but here's the real beauty: "GAAP net loss and non-GAAP net income for the third quarter of 2010 both include $3.6 million, or $0.11 per share, of expenses associated with the launch of Version 4 TOTALe. Excluding the launch expenses, non-GAAP net income per share was $0.12."

I'm sorry, but launch expenses for a new product certainly qualify as a regular cost of doing business. I'm backing that baby back in, thank you very much.

All told, Rosetta's sales fell 9% year over year despite that much-vaunted new product launch, and the non-GAAP earnings I'm willing to accept dove to $0.01 per share from $0.29 per share a year ago. Rosetta Stone fell more than 10% on the news and deserved every ounce of that pain.

Follow Rosetta Stone through ups, downs, and innovative accounting practices by adding the stock to your Foolish watchlist.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Intel is a Motley Fool Inside Value recommendation. NVIDIA and Rosetta Stone are Motley Fool Stock Advisor selections. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 16, 2010, at 10:07 AM, FoolVool wrote:

    I invested in RST and DISCK in 10/2010 by following Fool's "Stock adviser" service advice. I m in 10k loss now... :(((

  • Report this Comment On November 16, 2010, at 12:55 PM, mjtri wrote:

    I totally agree with the article. The above expenses SHOULD be part of the company's earnings. Hopefully the new CFO takes care of these issues. I'm long on RST, but am starting to reconsider.

  • Report this Comment On November 24, 2010, at 10:26 AM, Shepp67 wrote:

    RST was not recommended in October 2010 by SA, it was Feb 2010 and @16.81. After a bit of my own Due Diligence I bought in at 17.09.

    Unless you've sold your positions, you really haven't lost anything yet... right?

    if you believe in a company, not matter who you got the buy recommendation from, should you not be in for the long haul and not let these day to day blips mess with your mind?

    SA recommendations are just that - not marching orders to go buy NOW/TODAY. You can't expect to just pay your annual fee and think you're somehow going into autopilot - you still have to do your own research, and make up YOUR OWN MIND to buy or not.

    If you are on TMF often you're going to find SA picks being beaten about the head by others at TMF. I find it odd, and counter-intuitive but, I also view it as I get both sides of the coin and not just a hype service. If every TMF recommended stock (from any of the TMF services) was written about glowingly by every contributor, I might feel like perhaps this is a hype service. My experience over the past year and a half tell me the opposite.

    Go pickup One Up on Wall Street by Peter Lynch.

  • Report this Comment On February 22, 2011, at 10:16 AM, wimtex wrote:

    I have not seen any recent comments from TMF. Am I missing something or is TMF sticking to it's guns on RST?

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