Google GAAP and non-GAAP EPS

Lots of acronyms up there in the title. But I wanted to pick up what just appeared on the Google Blog. They are explaining why they will publish both GAAP EPS and pro-forma, non-GAAP, EPS in their earnings announcement. This is all about the question whether stock based compensation is a cost or not. It does not really cost the company anything but it does cost the shareholder something in that there are suddenly more shareholders out there and the EPS decreases (as it’s profit / shares out there). But let’s not get into that discussion.

One thing would make Google’s post a bit clearer. Under GAAP, as far as I understand it, they deduct their $100 million (for example) of stock based compensation from their revenue to decrease their profit. With taxes at 35%, that means that they save $35 Million in taxes. So when they add back the $100 million to their profit to show you their pro-forma numbers, they really need to (who cares if analysts are too lazy) substract the $35 Million again, because if the $100 Million were not cost, then they would have to pay $35 Million in tax, which means their profit only increases by $65 Million.

Still weird to see that somebody that quoted Warren Buffet in their IPO does not treat stock based compensation as cost. Looking forward to the earnings announcement, even though I do not have any stock in Google and with Yahoo! and Microsoft and others entering the playing field it will be interesting to see the profit move with Google in the next year.