Fair Game: Earnings, but Without the Bad Stuff

And managers of companies that have generated only losses, like Twitter — and even those that are profitable — are happy to suggest metrics that they think are better suited for assessing their operations.

Managements’ recommended measures, typically not found in generally accepted accounting principles, have an uncanny way of burnishing a company’s results. They do so by eliminating some pesky costs of doing business.

As such, these benchmarks are also known as earnings without the bad stuff. They were central to the valuations that propelled Internet stocks skyward in the late 1990s. Then, the higher the market climbed, the kookier the metrics became.

My favorite measure was used by analysts to hype the prospects of Homestore.com, a web-based provider of real estate services. They lauded its potential because of the “share of mind” it enjoyed among its customers.

That “share” may have been meaningful in early 2000, as the company’s stock hit $489, but it vanished quickly when Homestore.com crashed in 2001. (Stuart Wolff, a former C.E.O., was sentenced to prison in 2010 after pleading guilty to conspiracy to commit securities fraud.) The company now operates as Move Inc.; its stock closed Friday at $16.09.

What costs do companies want investors to remove from the income statement? Among the most popular are those associated with stock-based compensation, like options and restricted stock. Because these forms of pay aren’t made in cash, the theory goes, they should be backed out of a company’s expenses.

Twitter’s recent prospectus serves as an example. Its management suggests that investors not focus solely on its $134 million net loss for the first nine months of 2013, a figure calculated under generally accepted accounting principles. If you want to see the company’s operating results “through the eyes of management,” the prospectus suggests, look at its “non-GAAP net loss” of $44 million for the period.

To get to that figure, Twitter backs out two large costs. Stock compensation for the first three quarters of 2013 is the biggest, at $79 million. Twitter also removes $11 million in costs associated with amortizing or reducing the value of intangible assets it acquired previously.

There’s nothing improper in Twitter’s filing. But the idea that these items don’t cost the company is nonsense, says Jack T. Ciesielski, an accounting expert at R.G. Associates in Baltimore and publisher of The Analyst’s Accounting Observer.

“When they back out stock-based compensation they’re basically saying that management is working for free,” Mr. Ciesielski said. “And we know that’s not the case.”

Ditto for the intangibles, he said. “When they acquired a company, they spent money for things like in-process research and development, contracts and customer lists,” he added. “To back out those intangibles is bogus.”

Twitter is just one of many companies that point shareholders to rosier earnings measures. And when they do so, they’re adhering to a 2002 rule prescribed by the Securities and Exchange Commission in response to the Enron and WorldCom accounting frauds. That rule, known as Regulation G, allows companies to use nontraditional metrics in financial reports, but only if they present generally accepted accounting measures alongside so that investors can compare the two.

If the S.E.C. wanted its rule to discourage accounting gimmickry, it failed, Mr. Ciesielski said. “The S.E.C. inadvertently legitimized the practice with Regulation G,” he added. “It’s defining behavior down — once people start doing this, everybody’s got to be on the same page. If company Y is backing out stock-based compensation, why wouldn’t company X do the same? Its results would only look worse if it didn’t.”

To plumb the popularity and pervasiveness of such metrics, Mr. Ciesielski and his associates analyzed filings from technology and health care companies in the Standard & Poor’s 500-stock index. They identified those that presented nontraditional figures to investors and compared those results with the companies’ actual earnings for 2011 and 2012.

Technology and health care industries are both heavy users of adjusted earnings measures in their financial statements, Mr. Ciesielski said. Of the 69 technology companies in the index, he found that 56 used non-GAAP earnings presentations; of the 54 health care companies, 45 used them.

Corner Office: Kris Duggan of Badgeville, on the ‘Getting Stuff Done’ Index

Q. How do you hire?

A. The most important thing is to have a framework that everybody in the company knows. So we said: Let’s just come up with something very simple that is easy to understand and that people can use every day in their interviewing skills.

The first is to hire people who are experts in their domain. It’s really about excellence. So I will ask people, “Are you an expert in your field, and if you are, help me understand your field.” Then I ask, “How did you acquire this knowledge?”

The second thing I’m looking for is “sparkle.” Is this person contagiously enthusiastic? You may be an expert in your field, but if you don’t communicate well, or if you don’t get people excited, or you’re not passionate or enthusiastic, that’s going to be a hindrance. And it’s not the difference between being introverted or extroverted — you can just see it in somebody if they have the magic.

The third thing we look for is people who just get stuff done. We’re very focused on metrics — we have goals and controls, and everybody in the company has them. We even have a rating system we use to score employees, from 1 to 5, based on their “getting stuff done” index every quarter. People take the scoring concept very seriously, and really like the accountability and the transparency around some of these things — and the fact that they’re empowered to get stuff done.

The other critical thing we’ve done in our hiring process is to require every candidate to do homework. It varies by department and by function, but every hiring manager has to have a homework assignment for open positions. We just hired a director-level marketing position, and they had to come in and present their plan for what they would do for the company to drive their marketing strategy.

I’ve found that there are so many biases that we create or imagine when we’re going through the hiring process — this person came from that school or they seem very polished, whatever the biases might be. But when you have them put pen to paper, and compare that against a field of candidates, you get a much clearer picture of how they think and work.

We also don’t set deadlines for handing in the homework. We let them set the deadline, but then we track very closely how they perform relative to that. So we’d never say, “You owe us the homework by tomorrow.” We would say: “We’re very interested in you, and we’d like you to do some homework, and here’s the assignment. Do you have any questions about that? And when would you like to submit the homework?” That’s one way we can test for their behavior — do they get it done on time, or do they make excuses because it’s late? What I’ve found from all the interviews I’ve done in the last 10 years is that whatever nagging suspicion you have during the interview process about their behavior will be magnified 10 times after you hire them.

Q. You mentioned the importance of having shared goals in the organization. Can you elaborate?

A. I think organizations have a hard time communicating up and down the chain of command and getting everybody mobilized to focus on the same goals. I’ve experienced that firsthand — whatever your task or scope of work, you don’t know how that connects to your manager and your manager’s manager, and how that is all kind of interconnected.

So the biggest thing we focus on is this concept of “interlock.” It’s about how we get all the departments connected with their goals — from the C.E.O. to the front-line person — so that all of those goals and controls are transparent. Everybody should know what everybody’s goals and controls are, and everybody should understand their individual ones relative to their department, and their department’s goals relative to the company’s.

This interview has been edited and condensed.

Bucks Blog: When Free Stuff Leads You Astray

The main menu on Waze, a navigation and traffic app.

We all like freebies. But sometimes, free stuff can lure you into making choices that may not really be best. I learned that lesson anew last week, while on a road trip that took me through rural parts of Arkansas and Missouri.

A quick comparison of flying time versus driving time had led me to choose the automobile for this outing. That meant I’d be behind the wheel for about six hours, but at least part of the route promised to include scenic foliage, and the weather looked good.

Since I was driving alone, I decided to use a voice-guided G.P.S. system, to avoid having to check maps while dodging road kill. I had recently acquired an iPhone (not the most recent version, infamous for its map snafus). So I did a quick online search to see what navigation app might work best. My cellular provider, Verizon, offered one, for an extra $5 a month. That might not sound so pricey, but I think my cellphone bill is already outrageous, so I balked and kept searching.

I quickly — too quickly, it turns out — settled on a free app called Waze that got high marks from various reviewers (including one for The New York Times). The app’s main benefit is that it pools information from its users and sends back real-time information about traffic conditions, making it particularly popular with urban commuters seeking to avoid freeway snarls. I perhaps should have realized that an app aimed at commuters traveling familiar routes might not be the best fit for my purposes. But I figured it could still give me basic directions — and did I mention that it was free?

I ran a short test of the app the day before my trip, as I was running an errand, and it seemed to work. So I was hopeful when, in my driveway in the predawn darkness, I fired up the app and typed in the address of my destination. But at the end of my street, it told me to turn left. The correct option was to turn right. O.K., I thought, it will recalculate my route when it “sees” where I’m going. Ten miles later, it was still haranguing me to turn left — as if I were driving in some alternate universe, in which Missouri is west of Arkansas.

Michal Habdank-Kolaczkowski, communications director for Waze, explained that the app, which was introduced in the United States in 2009, begins with maps from the United States Census Bureau’s Tiger system, but that they are tweaked and updated constantly by Waze users. That means that in areas like Los Angeles, where the app claims 10 percent of drivers as users, the maps get constant feedback from users, who help keep the app updated. In flyover country, however, there are fewer users — at least for now — so the maps are not always as accurate. (That’s too bad. I wish the app could have warned me about those early-morning rural school buses, stopping every mile or two to pick up farm children.)

He encouraged me to correct any errors in the map, which is how Waze users benefit the system and others. But that is more of a commitment than I want to make for a one-time trip. I guess Waze isn’t for me right now. Except for intermittent reporting trips, I work at home, so the commuting I do usually is from my desk to the coffeepot.

After realizing that Waze was not going to get me where I needed to go, I debated whether to forge ahead without electronic assistance. The directions on my print map looked simple enough, but I had an appointment to keep and didn’t want any delays. So I pulled over and hunted down a new app on my phone. Not wanting to waste time, I opted for the Verizon app, VZ Navigator. It would give 30 days free on trial, it turned out, and it got me to my destination without a hitch. I wish I could say the same for the radio options on my route. I didn’t have satellite radio or an iPod jack, so I had to choose between classic rock (Pat Benatar is as annoying now as she was then) or Glenn Beck (news flash: stockpiling nonperishable food is the new version of investing in gold).

The trip back home was almost as smooth, after an initial problem. When I tried to retrace my route in reverse, the VZ Navigator kept telling me to “take the next legal U-turn” for the first 20 minutes or so. It finally gave up and reset itself — just before I was about to turn it off and sing along to some vintage Journey.

Have you had any disappointing experiences with free stuff? What happened?

App City: Letting Movers Compete to Haul Your Stuff

“You have a big headache, and go through this whole process, and that’s when it’s done properly,” said Mr. Ben-Harosh, the founder of Unpakt. The company, which he started this summer, is one of two young local start-ups looking to use the Internet to upend the moving industry. Their goals may fall short of making moving pleasurable, but their leaders think they can make it less of an ordeal by forcing moving companies to compete openly.

Strangely, this has never quite happened. In order to get a moving company to estimate how much it will charge to take a job, customers have to itemize all of their possessions, often by arranging a face-to-face meeting with an agent from a mover. If the customers want to compare this estimate with another company’s rates, they will have to repeat the process with someone else.

This does not encourage comparison shopping. Kelly Eidson founded Moveline to operate like Kayak, the travel Web site where users see several companies’ rates for airline flights, hotel rooms and other services. Moveline helps customers itemize their possessions one time, and companies bid for their business. Moveline vets movers for quality, and the customer can choose based on price.

But there was one problem, said Ms. Eidson: people are no good at giving a realistic description of all their worldly possessions, which makes it hard for moving companies to provide realistic price quotes.

“You never really know how much stuff you have,” she said.

The solution is Moveline’s iPhone app, which was released last month. The app coaches customers on how to use the phone to make a video of their possession-filled apartments. Customers can also use FaceTime, the video chat feature, to give a Moveline representative a virtual tour. The company then makes an inventory itself, telling you things like, no, you can’t fit that walk-in closet full of winter coats into a single cardboard box. (The app is for iPhones only; Ms. Eidson said the video chat features on Android phones were not as good.) The process takes three to four minutes per room, Ms. Eidson said. Instead of using estimates, Moveline requires movers to guarantee the price of their bids.

Eliminating the uncertainty of an estimate is also a basic goal of Unpakt. Before Mr. Ben-Harosh started the company, he founded a company called FlatRate Moving, which offered a similar guarantee by breaking each job into dozens of variables and pricing each one. With Unpakt, Mr. Ben-Harosh essentially offers other movers access to this system. Each mover sets its price for various aspects of a move, and when Unpakt gets a detailed inventory from a customer through its Web site, it automatically generates a bid from each of its movers. (There are currently 12 in the New York area.)

FlatRate Moving is one of the companies bidding on the business generated by Unpakt, but Mr. Ben-Harosh said that the automated system did not steer business his way. He acknowledged that other moving companies were initially reluctant to participate. But he argued that the existence of a freely available online standard was incentive enough for small moving companies that did not necessarily want to build their own software platforms.

“In a way, we are introducing them to the online world,” he said.

Have a favorite New York City app? Send tips via e-mail to appcity@nytimes.com or via Twitter to @joshuabrustein.