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Yahoo and Google not counting revenue the same way

For guidance, many look at Yahoo, another Internet company with a business similar to Google's and which has been public since 1996.

But Yahoo and Google don't count revenue the same way, making it hard to compare many aspects of the two companies' finances. Google uses a more-conservative definition that has the effect of damping its revenue and increasing its profit margins.

Yahoo Inc. reported first-quarter revenue of $758 million. Looked at another way, Yahoo said revenue totaled $550 million. Rival Google Inc. said its first-quarter revenue totaled $390 million. Or maybe it was really $652 million.

Confused? Pity the investors trying to place a value on Google for its highly anticipated initial public stock offering.

The differences demonstrate that accounting standards may be "generally accepted," but they aren't always uniformly interpreted. And details about revenue-recognition policies buried in the fine print of financial statements can trip up less-than-seasoned investors.

In this case, the difference revolves around the way that Yahoo and Google treat revenue from small-text advertisements that they place on other companies' Web sites.

The two Internet companies effectively act as technological intermediaries and quasi-advertising agencies, bringing together Web publishers and advertisers. Yahoo and Google get paid each time an Internet user clicks on an ad, then give some of that money to the Web publisher on whose site the ad appeared. (Yahoo and Google also accept ads for their own sites, and both companies account for them in the same way.)

In accounting terms, however, that is where the similarities end. Yahoo counts as revenue the "gross" amount it is paid. It counts its payment to the publisher as an expense, labeled as a "traffic acquisition cost." Google, by contrast, counts as revenue only the "net" amount remaining, after it pays the Web publisher.

Here's how it works in practice: XYZ Corp. places ads on the sites of UVW Corp., through Yahoo, and RST Corp., through Google. Both ads generate $5 in revenue, with $3 going to the publishers. Yahoo would count $5 revenue and book a $3 expense. But Google would record only $2 in revenue.

In the case of Yahoo and Google, the proper accounting treatment depends on whether the company is merely an "agent" facilitating a deal, or a "principal" that stands to lose money, if, for example, an advertiser fails to pay.

A Yahoo spokeswoman says the company reports gross revenue "based on our interpretation of the accounting guidance and our contractual terms." In SEC filings, Yahoo says it must use gross revenue because it is "the primary obligor" to the publishers.

Google, by contrast, says in its SEC filing that it reports net revenue because "we are not the principal to transactions." Instead, Google says users view the ads on the Web sites of independent publishers, who determine what ads they accept. A Google spokeswoman declined to elaborate, citing the quiet period around the pending IPO.

"You have to know what all the mechanics are under the transaction to be able to say that is right or that's not right," says Jack Ciesielski, publisher of Analyst's Accounting Observer.

The accounting choices result in very different images for investors. For those who value companies based on revenue, or revenue growth, Yahoo's formal presentation makes its revenue appear to be larger, and growing faster. Yahoo's as-reported gross revenue grew 168 percent in the first quarter; net revenue grew a robust, but less-impressive 94 percent.

Likewise, Google's choice of net revenue slows its growth rate, because revenue from the ads Google places on other sites is increasing faster than total revenue. In the first quarter, Google's revenue grew 122 percent. On a gross basis, however, revenue grew 162 percent.

Source: Wall Street Journal and Contra Costa Times

Posted by nakul at May 11, 2004 07:43 AM | TrackBack