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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.