I'm currently pitching a high growth tech company (+55% revenue Yoy) and they give guidance and quarterly earnings on a non-gaap basis, which makes it hard to project IS items on a gaap basis. I know the adjustments to make, but I'm not sure whether this company is valued on a gaap or non-gaap basis - SBC, amort of acquired intangibles, and litigation expenses are excluded in non-gaap, but not sure how to project those out.
The discrepancy between gaap and non-gaap is also pretty big, with SBC being a major item. Should I continue projecting out items on a gaap basis or non-gaap? Everything management says is non-gaap.
It's your job as an analyst to decide what you want to include in your valuation of a company. I generally believe that, whatever you do, you should be able to link your numbers back to GAAP reported numbers and the non-GAAP numbers used by the company. This way you can talk to both management and other parties in a language they will understand. SBC is a real expense as it's a form of compensation. As it's a non-cash expense it gets added back to the SOCF anyway. If the bulk of a company's cash flow is generated from adding back non-cash SBC you might be overvaluing a company using a FCF valuation approach. If you exclude SBC from expenses, you may also be overestimating underlying earnings. Ask yourself this, if the company didn't offer SBC would they be able to keep or attract their employees?
Thanks for response. I'm able to reconcile between non gaap/gaap. Since they are tech growth co., substantial compensation is SBC, which is fairly standard-should be dampening down a few years going forward.
Also, seems to me the street values this company on a non gaap basis as they report non-gaap earnings on calls.
A question I have is in the cash flow statement, they use gaap net income on top and they also report CFO on gaap basis. This doesn't seem like this makes sense, as they are judged on a non-gaap basis for net income and operations but gaap basis for CFO.
Would I also have to reconcile non gaap to gaap from IS to CFS when spreading the financials? Thanks.
Also, how would I project the adjustments like SBC and litigation costs?
All non-GAAP numbers come from GAAP numbers so you start by projecting the GAAP numbers and then adding/subtracting out the adjustments that get you to the non-GAAP numbers. The SEC requires companies to disclose in their filings how to get from GAAP to non-GAAP numbers so the adjustments should be in the 10K and 10Q. So build your model based on GAAP numbers first and then add a section for non-GAAP numbers later.
The cash flow makes perfect sense as they are required to report a cash flow statement in accordance with GAAP. Companies only really use non-GAAP reporting for the P&L. The analysts mostly value these companies on earnings so not as much focus is put on the cash flow statement.
You can't really project litigation costs as they are usually non-recurring items. All you can do is look at what guidance management has given in earnings calls or in the accounts. For SBC, you can look at what it is on average for more mature tech companies as a % of revenue. I think for large established software players like Salesforce or SAP it's around 12-14% of revenue per year.
I'm going to be honest....this does not seem like it's going well. I hope this is not for a job interview anytime soon.
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