Welcome to our second “Comment of the Week” blog. We are always looking for evolving SEC focus areas, and the use of “metrics” is clearly becoming an important issue.
Check out any tech company’s earnings release and you will see various metrics. Here is an excerpt from Facebook’s second quarter release as an example:
Second Quarter 2014 Operational Highlights
Daily active users (DAUs) were 829 million on average for June 2014, an increase of 19% year-over-year.
Mobile DAUs were 654 million on average for June 2014, an increase of 39% year-over-year.
Monthly active users (MAUs) were 1.32 billion as of June 30, 2014, an increase of 14% year-over-year.
Mobile MAUs were 1.07 billion as of June 30, 2014, an increase of 31% year-over-year.
You can read the whole release at:
http://investor.fb.com/releasedetail.cfm?ReleaseID=861599
The SEC Staff will frequently ask questions about whether such metrics really do correlate with financial performance. Here are three example comments.
3. We note your disclosure on page 40 of Annualized Recurring Revenue and number of paid subscriptions for your Digital Media segment’s…and Document Services offerings. Please tell us how you considered disclosing the same metrics for your Digital Marketing segment’s subscription offerings…As part of your response, please tell us if there are any other key metrics used by management to evaluate the Digital Marketing segment’s subscription offerings and tell us what consideration you have given to disclosing any such metrics. See Section III.B.1 of SEC Release No. 33-8350.
4. We note your disclosure that renewals for your…services were one of the primary reasons for the fiscal 2013 increase in deferred revenue. We also note your disclosure on page 60 of your 2012 10-K that you “expect renewal rates associated with…, and potentially other subscription offerings, will become key metrics used to measure their performance.” Please tell us the extent to which you consider renewal rates to be key metrics and whether you believe that these metrics contribute meaningfully to understanding and evaluating your company. Please tell us what consideration you gave to disclosing renewal rates for each of your subscription offerings…See Section III.B.1 of SEC Release No. 33-8350.
5. We note your disclosures on pages 2, 85 and elsewhere regarding social media metrics concerning your…Network and G…Channels. To the extent management uses these metrics as key indicators of operating performance, please identify the specific metrics used and address them in your Results of Operations, as appropriate. Also provide an explanation of your calculations. For guidance, please refer to Part III.B.1 of Interpretive Release No. 33-8350 (December 19, 2003), available on the Commission’s website.
Interestingly, the staff in many cases refers companies back to FR 72’s discussion of key performance indicators (the reference to Release No. 33-8350). You can find FR 72 at:
http://www.sec.gov/rules/interp/33-8350.htm
The discussion referenced starts with these words:
1. Focus on Key Indicators of Financial Condition and Operating Performance. As discussed, one of the principal objectives of MD&A is to give readers a view of the company through the eyes of management by providing both a short and long-term analysis of the business.25 To do this, companies should “identify and address those key variables and other qualitative and quantitative factors which are peculiar to and necessary for an understanding and evaluation of the individual company.”26
Financial measures generally are the starting point in ascertaining these key variables and other factors. However, financial measures often tell only part of how a company manages its business. Therefore, when preparing MD&A, companies should consider whether disclosure of all key variables and other factors that management uses to manage the business would be material to investors, and therefore required.27 These key variables and other factors may be non-financial, and companies should consider whether that non-financial information should be disclosed.
Many companies currently disclose non-financial business and operational data.28 Academics, authors, and consultants also have researched the types of information, outside of financial statement measures, that would be helpful to investors and other users.29 Such information may relate to external or macro-economic matters as well as those specific to a company or industry. For example, interest rates or economic growth rates and their anticipated trends can be important variables for many companies. Industry-specific measures can also be important for analysis, although common standards for the measures also are important. Some industries commonly use non-financial data, such as industry metrics and value drivers.30 Where a company discloses such information, and there is no commonly accepted method of calculating a particular non-financial metric, it should provide an explanation of its calculation to promote comparability across companies within the industry. Finally, companies may use non-financial performance measures that are company-specific.
So, as you think about metrics, be sure they correlate to financial performance, and don’t forget about FR 72. As usual, we would love to hear your thoughts!