Essay Example on Non GAAP Standards For analyzing financials Demand








Non GAAP Standards For analyzing financials Demand uses two non GAAP based metrics revenues net of traffic acquisition costs ex TAC and Adjusted operating income before depreciation and amortization expense or Adjusted OIBDA Using non GAAP standards might be acceptable when disclosing results internally however given that the firm seeks to request for an IPO GAAP reporting standards should be considered for clarity amongst investors Non GAAP standards have certain limitations as they don t adequately reflect all income and expense cash flows affecting the company s operations They also don t have standardized meanings and therefore other firms may use similarly named terms but exclude different items Demand feels that the framework doesn t adequately represent their financial health It can compensate for this by reconciling the non GAAP financial measures to their most comparable GAAP financial measures Investors and others can use this document to review the company s financial information and create a relevancy with the GAAP framework Demand media however doesn t provide such a framework and hence their terms can be misleading for investors Capitalization of Online Media Content instead of Expensing vs Other Competitors

The firm s policy of capitalizing costs of online media content and amortizing them over a 5 year period as opposed to the industry standard of expensing them is unusual The firm is overly aggressive in capitalizing costs in this manner Doing so allows Demand to show lower expenses for the period during which the cost was incurred For example recording an expense of 10000 for freelancers of the content creation as an intangible asset and amortizing it over 5 years allows Demand to show expenses of just 2000 per year which significantly reduces their losses This practice of offsetting content creation costs to future years is a misrepresentation of their finances Costs capitalized by Demand Media relate to content Internet domain registration and maintenance and internal development of software This strategy of reporting could be attributed to the fact that Demand was in line to request for an IPO and wanted to inflate its net income shareholder s equity cash flow from operations Online Content Asset Demand s online content can t be considered an asset it needs to be expensed instead of amortized for accurate reporting Because future benefit is hard to quantify given that online media content can be accessed over several years its benefit is hard to quantify and because of its low market price Statement of Operations Analysis This statement shows that Demand is operating at a net loss every year However the Net loss is decreasing shown by the increase in revenue and due to the fact that Demand is approaching positive cash flows in future years 

Topline revenue does show healthy growth yet don t reflect investment activities in intangibles from cash flow While investment in intangibles doubled revenue only grew by 27 Furthermore revenues were overstated as they accounted for amortizing costs in a straight line depreciation method Demand continued to generate net losses despite showing revenue growth Cash Flow Analysis Demand is focused on aggressively purchasing intangible assets and a quick look at its statement of Cash Flows tells us that they generate positive cash flows While the increase is minimal from 2008 to 2009 in 2009 the firm s intangible asset purchases amounted to 22 701k and in 2010 this amount jumped to 47 196k a significant increase leading to making intangibles 71 of their cash flows which reflects the earlier point about Demand purchasing competitors aggressively This also helps explain the high goodwill value given that the firm is aggressively purchasing its competitors for inflated amounts accounting for increased goodwill The aggressive accounting policy also helps explain the significant increase in the depreciation and amortization value The firm is spending cash too quickly shown by the significant decrease of the current ratio Depreciation accounts for 84 of their cash flows from operations which is untenable as depreciation is not a tangible revenue source something investors must be wary of Balance Sheet Analysis Analyzing Demand s balance sheet as mentioned Goodwill needs to be revaluated along with their Intangible assets

Additionally demand continues to lose cash despite overstating its financial position as emphasized by their liquidity ratios Competitors WebMD expenses the cost of creation by including these costs in their cost of operations New York Times only classifies purchased content as an intangible asset and amortizes it Time Warner amortizes capitalized film and TV production costs each quarter We see that even compared to most of their subsidiaries operating within the same space Demand s policies are certainly quite aggressive and misrepresent the firm s status Policy Change Conservative Policy A shift in policy from the 5 year capital asset amortization strategy would reflect a significant impact on Demand s financial statements Even with an increase of a year their net loss would

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