There I was, all set to write a blistering article about the disappointing earnings report released by Audible (NASDAQ:ADBL), which provides downloadable spoken-word content. For those who missed it, the company reported a loss of $0.12 per share, based on generally accepted accounting principles, well below expectations of a loss of $0.04 per share. Remove stock-based compensation and Audible still missed, with a loss of $0.08. But revenue was $19.7 million, up 53% compared with last year. What the heck is it doing with all that money?

The other numbers appeared to be terrible, too. Revenue grew a lot, but expenses grew even more. The gross margin was down, and the operating margin was way down. Even taking out all the stock-compensation expenses, operating expenses were growing much faster than revenue. Something was amiss.

Then I remembered what was almost a passing remark by management during the conference call. Audible records as an expense all marketing costs in the quarter when they occurred. However -- and management spent more time talking about this -- the company had a very large increase in deferred revenue because of the way it changed membership plans, allowing customers to roll over unused book credits for up to six months. Let me explain the implications.

Under generally accepted accounting principles (GAAP), companies are supposed to report revenue when they earn it. If they are paid in advance for something, like a subscription, they record a liability on the balance sheet, called deferred revenue, for the portion of purchased services still to be delivered. As those services, such as downloaded books, are delivered, deferred revenue is decreased and reported revenue is increased.

By looking at Q1 2005's balance sheet, one realizes that the correct comparison is an increase in deferred revenue of $5.84 million year over year, instead of the increase from last December of $1.95 million. So how to compare apples to apples because of the change in handling deferred revenue?

If we increase last year's deferred revenue by 52.8%, the same amount that reported revenue increased, and then apply this quarter's gross margin of 53.8%, $2.42 million more falls to the bottom line. Remember, the lion's share of costs associated with the revenue has been paid, as noted in the conference call. Adding $2.42 million to net income changes the reported GAAP loss of $3.04 million to a non-GAAP loss of $620,000, or a loss of $0.025 per diluted share, ahead of estimates.

While these assumptions might not necessarily play out, I'm inclined to believe that once deferred revenue begins to make its way to the bottom line, earnings will improve (all else remaining equal, of course).

Deferred revenue notwithstanding, there is the concern that costs, such as technology and development, have increased significantly since last year, not all of which can be explained by stock compensation or marketing and support costs. Some of it is because of developing new products and services, such as wireless downloading to cell phones.

So there comes a point when investors should ask to see the money. Modern Internet and wireless technology is wonderful, but must every single capability be exploited? The fact is, customers saying "that's neat" doesn't necessarily equate to a viable product.

The bottom line: Keep licensing Audible Ready devices, keep the iTunes license, keep getting new books, and keep signing exclusive deals. But it's time to show investors the money.

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Fool contributor Jim Mueller is a former customer and a current shareholder of Audible. He follows the Fool's strict disclosure policy.