One of the many ways that the sluggish markets have changed our favorite stock-watching rituals is by draining all the simple-minded fun out of “earnings season.” We are at the peak of that season now, with hundreds of companies formally announcing their most recent quarterly results. In the good old days, all anyone seemed to care about was whether or not a given company “met expectations”—meaning whether or not its results were what Wall Street analysts had figured they’d be.
For most of the period during which “earnings season” rose to become a phenomenon tracked not just on Wall Street but among mainstream investors all over the country, beating expectations meant narrowing losses or growing profits. But in the case of, say, Yahoo, which announced its numbers yesterday after the closing bell, both revenue and profits are lately on the decline. As it happens, this decline is apparently not as bad as analysts had feared. And in the best-case spin, the results perhaps constituted a “worst is over” moment.
Maybe. But these days other numbers get as much attention as “expectations.” Much of the coverage of Yahoo’s earnings announcement, in fact, focused (if you can imagine) on its actual financial results—even going so far as to emphasize its real profit (or more properly lack thereof) and downplaying the “pro forma” version.
Pro forma results essentially are those that ignore “special” factors like restructuring charges. In Yahoo’s case, the company said it had earned $8.7 million—if you ignore various restructuring and other costs. If you count all those costs, it lost $48.5 million. It’s pleasing to see both numbers reported but real results getting more play. In fact it’s indicative of how far the pendulum has swung to note the amusing level of contempt in, for instance, this note on pro forma results in today’s Yahoo story in the Times: “As at most Internet companies, Yahoo has convinced analysts to ignore generally accepted accounting principles and look at its own custom ‘pro forma’ definition of profits.” Ouch! The Times drives home its skepticism by not even uttering Yahoo’s pro forma figure until the 14th paragraph of a 16-paragraph story. This skepticism strikes me as quite reasonable; the pro forma numbers are worth passing along, but others seem more important.
Even so, it was on the pro forma basis that Yahoo beat expectations—it “earned” a penny share by this measure, while Wall Street had expected it simply to break even. And this morning, the company’s shares were up about $1 in early trading. So, maybe it’s true that the earnings season ritual is changing—but slowly, slowly.