Over the past few quarters, starting with Warren Buffett’s annual letter, and continuing with various WSJ reports that the SEC would crack down on the practice, there had been speculation that non-GAAP adjustments would be phased out. But not yet… because if it wasn’t for non-GAAP addbacks, Microsoft would have missed badly on both the top and the bottom line.
As the company reported moments ago, its GAAP revenue and EPS were $20.6 billion and $0.39, both far below expectations of $22.1bn and $0.58.
However, when one adds back such items as Windows 10 deferrals to revenue (yes, Microsoft is not content with only fudging EPS, it did so to the top-line too, like Tesla), and “Impairment, integration and Restructuring charges” associated with the company’s “performance” of its phone business, one gets non-GAAP revenue and EPS of $22.6 billion and $0.69, both comfortably beating expectations, and why not:after all courtesy of non-GAAP addbacks its actual EPS number was boosted by 77%. All thanks to the oldest accounting trick in the book.
But wait that’s not all, because aside from MSFT’s revenue non-GAAP adjustments, the company decided to pull IBM’s favorite trick, namely adjusting tax rates, Microsoft somehow ended up paying a paltry $225 million on pretax income of $3.3 billion, or about 7%. To wit:
The current quarter effective tax rate reflected a favorable mix of our income between the U.S. and foreign countries, as well as benefits associated with distributions from foreign affiliates. As such, the GAAP and non-GAAP tax rates were 7% and 15%, respectively.
In other words, if MSFT had used a typical corporate tax rate of 25%, EPS would have been sufficiently low to where the company may have missed consensus earnings, either GAAP or non-GAAP.
For now, however, the market is delighted with this flagrant sleight of hand, and at last check, the company was trading about 4% higher in the after hours session.
via http://ift.tt/29LBi0e Tyler Durden