Non-GAAP Measures and Metrics: Getting it Right!

Transcription

1 Non-GAAP Measures and Metrics: Getting it Right! CAROL STACEY, CPA, DIRECTOR, THE SEC INSTITUTE GEORGE WILSON, CPA, DIRECTOR, THE SEC INSTITUTE 1

2 Module One Learning Objective One: Recall the major reasons that companies use non-gaap measures to report financial performance and cash flow Learning Objective Two: Recognize examples where non-gaap measures create concerns for regulators and investors 2

3 Module Two Learning Objective Three: Outline in detail the SEC s guidance for the use of non-gaap measures Discussion Outline: Details of Regulation G Details of Regulation S-K Item 10(e) When does Regulation G apply versus S-K Item 10(e) Compliance and Disclosure Interpretations 3

4 Module Three Learning Objective Four: Identify examples of the use of non-gaap measures Identify examples of the use of metrics Learning Objective Five: Identify frequent SEC comments about the use of non-gaap measures and metrics Discussion Outline: Example disclosures Example comments from the SEC staff 4

5 Module One L E A R N I N G O B J E C T I V E O N E : R E C A L L T H E M A J O R R E A S O N S T H AT C O M PA N I E S U S E N O N - G A A P M E A S U R E S TO R E P O R T F I N A N C I A L P E R F O R M A N C E L E A R N I N G O B J E C T I V E T W O : R E C O G N I Z E S O M E O F T H E C A S E S W H E R E N O N - G A A P M E A S U R E S C R E AT E C O N C E R N S F O R R E G U L ATO R S A N D I N V E S TO R S 5

6 What is a Non-GAAP Measure? We used to call these presentations pro-forma numbers. We don t use that terminology for them any longer, as the term proforma is used in Article 11 of Regulation S-X Non-GAAP measures are ways of looking at financial performance, liquidity and related financial issues with measures not defined in GAAP The SEC, until SOX, had no regulation specific to non-gaap measures, however, the CorpFin staff review process provided informal staff guidance The authority to regulate non-gaap measures came with SOX We will also discuss metrics, but there are currently no formal rules concerning the use of metrics, just informal staff guidance in the form of speeches 6

7 Why Do Companies Present Non- GAAP measures and metrics? Attempts to show core or recurring business results Exclude unusual or infrequent items Provide information about debt service coverage Provide information about fundamentals of the business Many reasons... 7

8 What is a Non-GAAP Measure? The regulatory definition of a non-gaap measure is: A non-gaap financial measure is a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that: (i) Excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the issuer; or (ii) Includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. 8

9 What is a Non-GAAP Measure? A non-gaap financial measure does not include operating and other financial measures and ratios or statistical measures calculated using exclusively one or both of: (i) Financial measures calculated in accordance with GAAP; and (ii) Operating measures or other measures that are not non-gaap financial measures. 9

10 What is a Non-GAAP Measure? A non-gaap financial measure does not include financial measures required to be disclosed by GAAP, Commission rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant. 10

11 What is a Non-GAAP Measure? GAAP refers to generally accepted accounting principles in the United States, except that: (1) In the case of foreign private issuers whose primary financial statements are prepared in accordance with non-u.s. generally accepted accounting principles, GAAP refers to the principles under which those primary financial statements are prepared; and (2) In the case of foreign private issuers that include a non-gaap financial measure derived from a measure calculated in accordance with U.S. generally accepted accounting principles, GAAP refers to U.S. generally accepted accounting principles for purposes of the application of the requirements of Regulation G to the disclosure of that measure. 11

12 Rules for Non-GAAP Financial Measures SOX created two rules: Reg G Applies to non-gaap measures in documents that are not filed Eg earnings release SK Item 10(e) & 20-F Gen l Instr C(e)) Applies to non-gaap measures in filed documents Eg Form 10-K, 10-Q, registration statements 12

13 A bit on Non-GAAP History Lots of history, Staff is/was skeptical An example An enforcement case 13

14 A bit on Non-GAAP History From the San Francisco Chronicle - Wednesday, January 31, 2001 Amazon.com to Eliminate 1,300 Jobs - Online retailer seeks first profit Carolyn Said, Chronicle Staff Writer Amazon.com, the largest and best-known online retailer, will cut 1,300 jobs, or 15 percent of its 8,500 workers, in an effort to get into the black for the first time ever later this year. Yesterday's announcement -- the first time Amazon has set a target date for profitability -- marks an about-face in the e-commerce giant's strategy of advocating growth over profits. Amazon appears to be trying to convince Wall Street that the company's long-term prospects remain strong, even after a year of dot-com carnage. "It is now time for Amazon to start making money," said Barry Parr, director of research firm IDC in Mountain View. "We have left the land-grab phase of the Internet. Now companies are starting to build on the land they've seized." 14

15 A bit on Non-GAAP History But, in Amazon s press release: AMAZON.COM EXPECTS PRO FORMA OPERATING PROFITABILITY IN FOURTH QUARTER 2001 Over the past year, our U.S. pro forma operating loss decreased from 24 percent of net sales in the fourth quarter of 1999 to less than 2 percent in the fourth quarter of 2000, said Warren Jenson, Amazon.com chief financial officer. While the strength of consumer spending remains uncertain, and there are no guarantees, we expect Amazon.com as a whole to reach operating profitability in the fourth quarter of this year. Was this potentially confusing? 15

16 A bit on Non-GAAP History A 2002 Enforcement Case Big hotel and casino company In their earning release the company expressly stated that net income and EPS figures excluded a $81.4 million one-time charge. Although neither the earnings release nor the accompanying financial data used the term pro forma, the net income and EPS figures used in the release were pro forma numbers because they differed from such figures calculated in conformity with GAAP by excluding the one-time charge. By stating that this one-time charge was excluded from its stated net income, the Company implied that no other significant one-time items were included in that figure. Contrary to the implication in the release, however, the stated net income included an undisclosed one-time gain of $17.2 million. 16

17 A bit on Non-GAAP History These sorts of use of non-gaap measures caused significant concern for the staff Also for investors! There was a need for change That change came with SOX! Reg G for non-filed documents S-K Item 10(e) and related sources for filed documents 17

18 The SEC s Current Perspective Mary Jo White Speech Mary Jo White - December, 2015 Keynote Address at the 2015 AICPA National Conference: "Maintaining High-Quality, Reliable Financial Reporting: A Shared and Weighty Responsibility Another financial reporting topic of shared interest and current conversation is the use of non-gaap measures. This area deserves close attention, both to make sure that our current rules are being followed and to ask whether they are sufficiently robust in light of current market practices. Non-GAAP measures are allowed in order to convey information to investors that the issuer believes is relevant and useful in understanding its performance. By some indications, such as analyst coverage and press commentary, non-gaap measures are used extensively and, in some instances, may be a source of confusion. 18

19 The SEC s Current Perspective Mary Jo White Speech, continued Like every other issue of financial reporting, good practices in the use of non-gaap measures begin with preparers. While your chief financial officer and investor relations team may be quite enamored of non- GAAP measures as useful market communication devices, your finance and legal teams, along with your audit committees, should carefully attend to the use of these measures and consider questions such as: Why are you using the non-gaap measure, and how does it provide investors with useful information? Are you giving non-gaap measures no greater prominence than the GAAP measures, as required under the rules? Are your explanations of how you are using the non-gaap measures and why they are useful for your investors accurate and complete, drafted without boilerplate? Are there appropriate controls over the calculation of non-gaap measures? 19

20 The SEC s Current Perspective James Schnurr Speech 12 th Annual Life Sciences Accounting and Reporting Congress March 22, 2016 Before I conclude today s remarks, I d like to provide my perspectives on non-gaap measures, which is a topic that continues to receive attention from investors, those at the SEC, as well as the general news media. 20

21 The SEC s Current Perspective James Schnurr Speech, continued The Commission adopted rules in 2003 addressing the disclosure of non-gaap financial measures, both generally and with respect to inclusion in SEC filings. While the Commission s rules allow companies to provide non-gaap measures to investors as alternative measures that supplement information in the financial statements, the rules are clear that the non- GAAP measures must not be misleading. The SEC staff has observed a significant and, in some respects, troubling increase over the past few years in the use of, and nature of adjustments within, non-gaap measures by companies as well prominence that the analysts and media have accorded such measures when reporting on the results of the companies they cover. 21

22 The SEC s Current Perspective James Schnurr Speech, continued Non-GAAP measures are intended to supplement the information in the financial statements and not supplant the information in the financial statements. However, when the financial news networks report quarterly earnings, they very frequently report the non-gaap measure of earnings with no reference to the actual GAAP earnings, often not even identifying it as having been adjusted. In addition, I am particularly troubled by the extent and nature of the adjustments to arrive at alternative financial measures of profitability, as compared to net income, and alternative measures of cash generation, as compared to the measures of liquidity or cash generation. In my view, preparers should carefully consider whether significant adjustments to profitability outside of customary measures such as EBITDA or non-recurring items or other charges to the business, such as the sale of portions of the business in order to provide the user with an understanding of how these events impact trends and future performance, are appropriate. As it relates to cash measures, I believe those measures should be reconciled to cash flow from operations. 22

23 The SEC s Current Perspective James Schnurr Speech, continued Staff in the Division of Corporation Finance continues to monitor non- GAAP disclosures as part of its selective review process and regularly issues comments on this issue. The staff also provides guidance on the application of Commission rules through speeches and other mechanisms and of course, staff comment letters are publicly available. You can expect that the staff will continue to be vigilant in their review of the use of these measures for compliance with the rules. 23

24 The SEC s Current Perspective James Schnurr Speech, continued The proliferation of non-gaap reporting measures among registrants, and reliance and reporting by analysts, should warrant increased focus by management and the audit committee. I believe the focus should go beyond determinations that the measures comply with the Commission s rules and include probing questions on why, in contrast to the GAAP measure, the non-gaap measure is an appropriate way to measure the company s performance and is useful to investors. In addition, companies should ensure that the measure is prepared in a manner that includes appropriate controls and oversight procedures. 24

25 Module Two LEARNING OBJECTIVE THREE: OUTLINE IN DETAIL THE SEC S GUIDANCE FOR THE USE OF NON -GAAP MEASURES 25

26 The SEC s Non-GAAP Rules SOX created two rules: Reg G Applies to non-gaap measures in documents that are not filed Eg earnings release SK Item 10(e) (SB 10(h) & 20-F Gen l Instr C(e)) Applies to non-gaap measures in filed documents Eg Form 10-K, 10-Q, and registration statements There are also several interpretations in the SEC s Compliance and Disclosure Interpretations (C&DI s) And in the CorpFin Financial Reporting Manual Topic 8 26

27 Reg G Non-Filed Documents General rules regarding disclosure of non-gaap financial measures. (a) Whenever a registrant, or person acting on its behalf, publicly discloses material information that includes a non-gaap financial measure, the registrant must accompany that non-gaap financial measure with: (1) A presentation of the most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP); and (2) A reconciliation (by schedule or other clearly understandable method), which shall be quantitative for historical non-gaap measures presented, and quantitative, to the extent available without unreasonable efforts, for forward-looking information, of the differences between the non-gaap financial measure disclosed or released with the most comparable financial measure or measures calculated and presented in accordance with GAAP identified in paragraph (a)(1) of this section. 27

28 Reg G Non-Filed Documents (b) A registrant, or a person acting on its behalf, shall not make public a non-gaap financial measure that, taken together with the information accompanying that measure and any other accompanying discussion of that measure, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-gaap financial measure, in light of the circumstances under which it is presented, not misleading. 28

29 Reg S-K Item 10(e) Filed Documents (e) Use of non-gaap financial measures in Commission filings. (1) Whenever one or more non-gaap financial measures are included in a filing with the Commission: (i) The registrant must include the following in the filing: (A) A presentation, with equal or greater prominence, of the most directly comparable financial measure or measures calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP); (B) A reconciliation (by schedule or other clearly understandable method), which shall be quantitative for historical non-gaap measures presented, and quantitative, to the extent available without unreasonable efforts, for forward-looking information, of the differences between the non-gaap financial measure disclosed or released with the most directly comparable financial measure or measures calculated and presented in accordance with GAAP identified in paragraph (e)(1)(i)(a) of this section; (C) A statement disclosing the reasons why the registrant's management believes that presentation of the non-gaap financial measure provides useful information to investors regarding the registrant's financial condition and results of operations; and\ (D) To the extent material, a statement disclosing the additional purposes, if any, for which the registrant's management uses the non-gaap financial measure that are not disclosed pursuant to paragraph (e)(1)(i)(c) of this section; and 29

30 Reg S-K Item 10(e) Filed Documents (ii) A registrant must not: (A) Exclude charges or liabilities that required, or will require, cash settlement, or would have required cash settlement absent an ability to settle in another manner, from non-gaap liquidity measures, other than the measures earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITDA); (B) Adjust a non-gaap performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years; (C) Present non-gaap financial measures on the face of the registrant's financial statements prepared in accordance with GAAP or in the accompanying notes; (D) Present non-gaap financial measures on the face of any pro forma financial information required to be disclosed by Article 11 of Regulation S-X (17 CFR through ); or (E) Use titles or descriptions of non-gaap financial measures that are the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures; and 30

31 Reg S-K Item 10(e) Filed Documents (iii) If the filing is not an annual report on Form 10-K or Form 20-F (17 CFR f), a registrant need not include the information required by paragraphs (e)(1)(i)(c) and (e)(1)(i)(d) of this section if that information was included in its most recent annual report on Form 10-K or Form 20-F or a more recent filing, provided that the required information is updated to the extent necessary to meet the requirements of paragraphs (e)(1)(i)(c) and (e)(1)(i)(d) of this section at the time of the registrant's current filing. 31

32 Reg S-K Item 10(e) Filed Documents 2) For purposes of this paragraph (e), a non-gaap financial measure is a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that: (i) Excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the issuer; or (ii) Includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. (3) For purposes of this paragraph (e), GAAP refers to generally accepted accounting principles in the United States, except that: (i) In the case of foreign private issuers whose primary financial statements are prepared in accordance with non-u.s. generally accepted accounting principles, GAAP refers to the principles under which those primary financial statements are prepared; and (ii) In the case of foreign private issuers that include a non-gaap financial measure derived from or based on a measure calculated in accordance with U.S. generally accepted accounting principles, GAAP refers to U.S. generally accepted accounting principles for purposes of the application of the requirements of this paragraph (e) to the disclosure of that measure. 32

33 Reg S-K Item 10(e) Filed Documents (4) For purposes of this paragraph (e), non-gaap financial measures exclude: (i) Operating and other statistical measures; and (ii) Ratios or statistical measures calculated using exclusively one or both of: (A) Financial measures calculated in accordance with GAAP; and (B) Operating measures or other measures that are not non-gaap financial measures. (5) For purposes of this paragraph (e), non-gaap financial measures exclude financial measures required to be disclosed by GAAP, Commission rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant. However, the financial measure should be presented outside of the financial statements unless the financial measure is required or expressly permitted by the standard-setter that is responsible for establishing the GAAP used in such financial statements. 33

34 Reg S-K Item 10(e) Filed Documents (6) The requirements of paragraph (e) of this section shall not apply to a non-gaap financial measure included in disclosure relating to a proposed business combination, the entity resulting therefrom or an entity that is a party thereto, if the disclosure is contained in a communication that is subject to of this chapter, a-12 or d-2(b)(2) of this chapter or of this chapter. 34

35 Non-GAAP Financial Measures C&DI s Staff guidance revised in 2010 because: Resulted in registrants excluding potentially useful information reported in places other than filings (e.g., earnings releases, websites) Wide diversity in application Opportunity to consolidate and add to guidance Highlights of the changes Determination as to whether per share presentation is appropriate was clarified - based on whether measure is liquidity (no) or performance (yes) Constant currency presentation guidance simplified 35

36 Non-GAAP Financial Measures C&DI s Question : Item 10(e) of Regulation S-K prohibits adjusting a non-gaap financial performance measure to eliminate or smooth items identified as nonrecurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years. Is this prohibition based on the description of the charge or gain, or is it based on the nature of the charge or gain? 36

37 Non-GAAP Financial Measures C&DI s Answer: The prohibition is based on the description of the charge or gain that is being adjusted. It would not be appropriate to state that a charge or gain is non-recurring, infrequent or unusual unless it meets the specified criteria. The fact that a registrant cannot describe a charge or gain as non-recurring, infrequent or unusual, however, does not mean that the registrant cannot adjust for that charge or gain. Registrants can make adjustments they believe are appropriate, subject to Regulation G and the other requirements of Item 10(e) of Regulation S-K. 37

38 Non-GAAP Financial Measures C&DI s Question Question: While Item 10(e)(1)(ii) of Regulation S-K does not prohibit the use of per share non-gaap financial measures, the adopting release for Item 10(e), Exchange Act Release No , states that "per share measures that are prohibited specifically under GAAP or Commission rules continue to be prohibited in materials filed with or furnished to the Commission." In light of Commission guidance, specifically Accounting Series Release No. 142, Reporting Cash Flow and Other Related Data, and Accounting Standards Codification 230, are non- GAAP earnings per share numbers prohibited in documents filed or furnished with the Commission? 38

39 Non-GAAP Financial Measures C&DI s Answer: No. Item 10(e) recognizes that certain non-gaap per share performance measures may be meaningful from an operating standpoint. Non-GAAP per share performance measures should be reconciled to GAAP earnings per share. On the other hand, non-gaap liquidity measures, such as cash flow, should not be presented on a per share basis in documents filed or furnished with the Commission, consistent with Accounting Series Release No

40 Non-GAAP Financial Measures C&DI s Question Question: Is Item 10(e)(1)(i) of Regulation S-K, which requires the prominent presentation of, and reconciliation to, the most directly comparable GAAP financial measure or measures, intended to change the staff's practice of requiring the prominent presentation of amounts for the three major categories of the statement of cash flows when a non-gaap liquidity measure is presented? Answer: No. The requirements in Item 10(e)(1)(i) are consistent with the staff's practice. The three major categories of the statement of cash flows should be presented when a non-gaap liquidity measure is presented 40

41 Non-GAAP Financial Measures C&DI s Question Question: Is it appropriate to present a full non-gaap income statement for purposes of reconciling non-gaap measures to the most directly comparable GAAP measures? Answer: Generally, no. Presenting a full non-gaap income statement may attach undue prominence to the non-gaap information. 41

42 Non-GAAP Financial Measures Question Question: Company X has operations in various foreign countries where the local currency is used to prepare the financial statements which are translated into the reporting currency under the applicable accounting standards. In preparing its MD&A, Company X will explain the reasons for changes in various financial statement captions. A portion of these changes will be attributable to changes in exchange rates between periods used for translation. Company X wants to isolate the effect of exchange rate differences and will present financial information in a constant currency e.g., assume a constant exchange rate between periods for translation. Would such a presentation be considered a non- GAAP measure under Regulation G and Item 10(e) of Regulation S-K? 42

43 Non-GAAP Financial Measures Answer: Yes. Company X may comply with the reconciliation requirements of Regulation G and Item 10(e) by presenting the historical amounts and the amounts in constant currency and describing the process for calculating the constant currency amounts and the basis of presentation. 43

44 Module Three L E A R N I N G O B J E C T I V E F O U R : I D E N T I F Y E X A M P L E S O F T H E U S E O F N O N - G A A P M E A S U R E S, A N D I D E N T I F Y E X A M P L E S O F T H E U S E O F M E T R I C S L E A R N I N G O B J E C T I V E F I V E : I D E N T I F Y F R E Q U E N T S E C C O M M E N T S A B O U T T H E U S E O F N O N - G A A P M E A S U R E S A N D M E T R I C S 44

45 A Non-GAAP Example An Earnings Release The release is available in the accompanying information for this One- Hour Briefing 45

46 Non-GAAP Financial Information This letter includes non-gaap financial information because we plan and manage our business using such information. Our non-gaap measures align the recognition of revenues and costs related to a vehicle sale with the time when the customer take delivery of the car and cash is received or owed to us. This contrasts with the approach of other automotive manufacturers who under GAAP accounting recognize revenue when the vehicle is sold into dealership inventory rather than to end customers, even though in the case of a captive finance lease they may not collect cash for several years on a consolidated basis. Our non-gaap revenue and gross profit is determined by adding back the deferred revenue and related costs for cars sold with resale value guarantee and where we have collected, or will collect from a bank intermediary in a matter of days, the purchase price of the car in cash. For cars leased directly by Tesla, we recognize lease revenue and related costs over the lease term and the same way for both GAAP and non-gaap purposes. Our non-gaap expense and per share information also exclude non-cash interest expense and stock-based compensation. Tesla Motors, Inc. Reconciliation of GAAP to Non-GAAP Financial Information (Unaudited) (In thousands, except per share data) Dec 31, 2015 Three Months Ended Sep 30, 2015 Dec 31, 2014 Dec 31, 2015 Year Ended Dec 31, 2014 Net loss (GAAP) Stock-based compensation expense Non-cash interest expense related to convertible notes and other borrowing Net income (loss) (Non-GAAP) including lease accounting Model S gross profit deferred due to lease accounting (1)(2) Net income (loss) (Non-GAAP) Net loss per share, basic (GAAP) Stock-based compensation expense Non-cash interest expense related to convertible notes and other borrowing Model S gross profit deferred due to lease accounting (1)(2) Net income (loss) per share, basic (Non-GAAP) Shares used in per share calculation, basic (GAAP and Non-GAAP) Net loss per share, diluted (GAAP) Stock-based compensation expense Non-cash interest expense related to convertible notes and other borrowing Net income (loss) (Non-GAAP) including lease accounting Model S gross profit deferred due to lease accounting (1)(2) Net income (loss) per share, diluted (Non-GAAP) Shares used in per share calculation, diluted (Non-GAAP) $ (320,397) $ (229,858) $ (107,629) $ (888,663) $ (294,040) 55,605 56,033 44, , ,496 26,716 21,850 20,826 86,247 75,019 (238,076) (151,975) (42,286) (604,417) (62,525) 124,190 77,022 26, ,515 82,626 $ (113,886) $ (74,953) $ (16,214) $ (294,902) $ 20,101 $ (2.44) $ (1.78) $ (0.86) $ (6.93) $ (2.36) $ (0.87) $ (0.58) $ (0.13) $ (2.30) $ , , , , ,573 $ (2.44) $ (1.78) $ (0.86) $ (6.93) $ (2.07) (1.82) (1.18) (0.34) (4.71) (0.44) $ (0.87) $ (0.58) $ (0.13) $ (2.30) $ , , , , ,221 (1) Includes deliveries of Model S with the resale value guarantee or similar buy-back terms and not deliveries under the Model S leasing program. (2) Under GAAP, warranty costs are expensed as incurred for Model S vehicle deliveries with the resale value guarantee or similar buy-back terms and subject to lease accounting. For Non- GAAP purposes, an estimated incremental warranty reserve of $14.9 million, $12.7 million and $5.5 million is included for the three months ended December 31, 2015, September 30, 2015, and December 31, 2014, respectively. For the year ended December 31, 2015 and 2014, an estimated incremental warranty reserve of $44.6 million and $14.6 million is included, respectively. Additionally, stock-based compensation of $4.3 million, $2.4 million and $1.0 million is excluded for non-gaap purposes for the three months ended December 31, 2015, September 30, 2015, and December 31, 2014, respectively. For the year ended December 31, 2015 and 2014, stock-based compensation of $10.6 million and $3.4 million is excluded, respectively. 46

47 A Metric Example An Earnings Release The release is available in the accompanying information for this One- Hour Briefing 47

48 ! Twitter Q4 and Fiscal Year 2015 Shareholder Letter SAN FRANCISCO, CALIFORNIA February 10, 2016 Dear Shareholders, As we announced last week, we re taking a new approach to our earnings announcements. Starting with today s announcement of results for the fourth quarter and fiscal year ended December 31, 2015, we ll provide you with an earnings letter reviewing our financial and operational performance together with commentary from our senior management team. We ll then use our conference call and Periscope broadcast to take your questions. As a reminder, to have your questions considered during Q&A, Tweet your question using #TWTR or submit your question via Periscope. We hope this new format will give you a clearer view of our performance and outlook in an easier-to-digest manner, while making the most of our time on the call. O V ERV I EW 2015 was another very strong year for Twitter. Total revenue reached $2.2 billion, up 58% year over year with more than $550 million in adjusted EBITDA. We made significant progress in scaling the total number of active advertisers to 130,000 in Q4, up almost 90% year over year. It's remarkable we built this business in just five years from zero revenue. We saw a decline in monthly active usage in Q4, but we've already seen January monthly actives bounce back to Q3 levels. We're confident that, with disciplined execution, this growth trend will continue over time. Q4 revenue totaled $710 million, an increase of 48% year-over-year. Excluding the impact of year-over-year changes in foreign exchange rates, revenue would have increased 53%. o Advertising revenue totaled $641 million, an increase of 48% year-over-year. Excluding the impact of year-over-year changes in foreign exchange rates, advertising revenue would have increased 53%. Mobile advertising revenue was 86% of total advertising revenue. o Data licensing and other revenue totaled $70 million, an increase of 48% year-over-year. o U.S. revenue totaled $463 million, an increase of 47% year-over-year. o International revenue totaled $247 million, an increase of 51% year-over-year. Q4 GAAP net loss of $90 million and non-gaap net income of $115 million. Q4 GAAP diluted EPS of ($0.13) and non-gaap diluted EPS of $0.16. Q4 adjusted EBITDA of $191 million, up 35% year-over-year, representing an adjusted EBITDA margin of 27%. Total average monthly active users (MAUs) were 320 million for Q4, up 9% year-over-year, compared to 320 million in the previous quarter. Excluding SMS Fast Followers, MAUs were 305 million for Q4, up 6% year-over-year, compared to 307 million in the previous quarter. Mobile MAUs represented approximately 80% of total MAUs.! 48

49 Non-GAAP and Metric SEC Comment Themes Frequent staff comments: Definitional issues Disclosure issues Eliminating non-recurring items (C&DI/FAQ 8) Full S-X Article 11-type presentations Presentations on the face of the financial statements 49

50 Non-GAAP and Metric SEC Comment Themes Clear labeling/description/ context/terminology GAAP measure s/b more prominent Disclose why non-gaap measure is useful to investors Disclose how management uses non-gaap measures, if they do Reconciliation of non-gaap measures Misleading disclosures are not allowed anywhere 50

51 Metrics - Examples High-Tech Industry Number of registered users to a company s website Number of active users, Daily average users (DAUs), Monthly average users (MAUs), Number of paying players for gaming companies, and Average revenue per user (ARPU) Retail Industry Comparable store sales Store openings Store closings 51

52 Metrics - Disclosures Clear definition and description of calculation Material limitations How it relates to performance 52

53 Example Comment -Metrics In your earnings call dated November 5, 2015, you discuss increases to your annualized revenue per average paid business account and your total number of customers paying you more than $5,000 per year. You also state that trends related to these metrics are in line with your strategy to focus on mid-market and enterprise customers. Please tell us what consideration you have given to disclosing these metrics on a comparative period basis and discussing any related trends in your management s discussion and analysis section. See Item 303(a)(3)(ii) of Regulation S-K. For additional guidance, please consider Section III.B of SEC Release No We note that you disclose the dollar-based expansion rate for the most recently completed period. Please tell us your consideration to also provide this metric for the comparable period presented in your financial statements, or for the previously completed period, and discuss any related trends. In this regard, you mention several factors that may impact your dollar-based net expansion rate in any particular quarter; however, it is unclear what, if any, impact each of these factors had on the actual changes in this metric from period to period. Please clarify, and quantify where possible, the specific factors that significantly impacted this metric for each period presented. [New Relic, Inc., SEC Staff Letter dated December 15, 2015, re: Form 10-K for the Fiscal Year Ended March 31, 2015 & Form 10-Q for the Quarterly Period Ended September 30, 2015] 53

54 Example Comment We note your disclosure that you believe that Adjusted EBITDA is helpful as an indicator of the company s financial performance and capacity to operationally fund capital expenditures and working capital requirements. Please tell us how you considered Item 10(e)(1)(ii)(A) of Regulation S-K. In this regard, we note that the description of the measure suggests its usefulness in part as a liquidity measure and the measure appears to exclude items that require cash settlement. [Rentrak Corporation, SEC Staff Letter dated March 11, 2015, re: Form 10-K for the Fiscal Year Ended March 31, 2014] 54

55 Example Comment We refer to the disclosure of free cash flow on page 2 of your earnings release. Tell us where you have disclosed the reasons you believe that presentation of the non-gaap financial measure provides useful information to investors regarding your company s financial condition and results of operations. Refer to Item 10(e)(1)(i)(C) of Regulation S-K. [The Cooper Companies, Inc., SEC Staff Letter dated March 19, 2015, re: Form 8-K Dated and Filed March 5, 2015] 55

56 Example Comment We see on page 5 of your earnings release that you present non-gaap financial measures and related reconciliations required by Item 10(e) of Regulation S-K in the form of non-gaap income statements. Please tell us how your presentation considers the guidance set forth in Compliance and Disclosure Interpretation Under the cited guidance, it is generally not appropriate to present a non-gaap income statement for purposes of reconciling non-gaap financial measures to the most directly comparable GAAP financial measures. [The Cooper Companies, Inc., SEC Staff Letter dated March 19, 2015, re: Form 8-K Dated and Filed March 5, 2015] 56

57 Example Comment We note that your earnings calls on August 14, 2014, November 6, 2014, and February 5, 2015 discuss research and development, sales and marketing expenses and general administrative costs on a combined non-gaap basis. However, we are unable to locate the reconciliation of such non-gaap measures to the most comparable GAAP measures in your earnings releases, website or filings. Please tell us what consideration was given to providing reconciliations of these non-gaap measures in accordance with Regulation G. [Paylocity Holding Corporation, SEC Staff Letter dated April 15, 2015, re: Form 10- K the Fiscal Year ended June 30, 2014] 57

58 Example Comment We note that you have presented operating cash flows from continuing operations within your Summary Operating and Financial Data. While presentation of cash flows from operating activities is useful, this data should be considered in the framework of a statement of cash flows which reflects management's decision as to the use of these cash flows and the external sources of capital used. The implication of a presentation which shows only the cash flows generated from operations portion of a cash flows statement is that the use of such cash flows is entirely at the discretion of management. Please also present your cash flows from investing and financing activities. See FRC [Ecolab Inc., SEC Staff Letter dated April 23, 2015, re: Form 10-K for Fiscal Year Ended December 31, 2014] 58

59 Thank you for participating! 59