Aggressive Accounting With Non-GAAP Measures are Misleading Investors
Starting 4Q13, the company changed how it presented non-GAAP earnings to investors:
In 1Q14, if JCOM had included amortization of acquired intangibles in its "adjusted" non-GAAP earnings/diluted share (as they did before), it would have been $0.55/share versus $0.76 presented. The timing of the change in non-GAAP earning presentation was perfect, as it was right before their previous non-GAAP earnings figure was going to dramatically diverge from their “adjusted earnings per diluted share.” The chart below shows the difference between their previous non-GAAP earnings versus the new “adjusted earnings.” When comparing “adjusted earnings” to actual net income/share the difference is even worse – for the most recent quarter GAAP EPS was $0.52 while “adjusted earnings” was $1.19.
While the SEC has been trying to crank down on non-GAAP presentation of financials, it also took notice of j2's presentation of a non-GAAP income statement as a reconciliation of GAAP to non-GAAP. What strikes me is JCOM’s rationale for excluding amortization and acquisition-related integration costs, seen below.
“Core operational performance” is nothing but acquisition-related revenues at this point - yet j2 decides to exclude amortization and acquisition related costs.
JCOM Responds to Citron With More Shenanigans
On their very next 1Q16 earnings call , they started breaking out the Cloud segment into both Cloud Connect and Cloud Services (Backup, E-mail Security, others), presumably, to silence critics such as Citron that have concerns about j2’s Cloud Connect organic growth.
At the very same time they also decided to move various “allocated personnel and corporate-related costs” from Cloud Connect to Cloud Services in their non-GAAP financials, giving the cash cow Cloud Connect a boost right when it needed it.
These “adjustments” were to the tune of $20.6M total from 2012-2016, conveniently timed after Citron’s report that questioned j2’s organic fax growth and also conveniently showing positive growth (however small) in Cloud Connect. The "Actual Adjusted EBITDA and Non-GAAP Operating Profit" below are before the personnel cost "adjustment" - small differences at first but growing to ~$7M in 2016.
After both of these moves, they also determined that certain costs that used to be classified as “global operating costs” in their 10-K were now directly attributable to Cloud Connect! From their 10-K, in 2014-2015 approximately $36M shifted from global operating costs to Business Cloud Services ($21.1M in 2015 and $15.1M in 2014).
J2 defines global operating costs as:
They don’t break out the impact to years prior to 2014. How is it that at the same time they allocated out ~$20M in costs from Cloud Connect to Cloud Services they also shifted $36M from “global operating costs” to Business Cloud Services?
Disclosure: I have no current positions in JCOM, and no plans to initiate any positions within the next 72 hours. In the past, I have had short positions in JCOM.