Another serving of those pro-forma results…

“Pro-forma” adjective, referring to financial statements this word describes the various “adjustments” to an actual, reported result (eg. revenue, income, costs, etc.) to show a hypothetical, expected or potential outcome that did not actually happen due to any number of factors. Companies and their bankers present pro-forma numbers in their attempt to get buy-siders and investors to ignore reality and believe their good story.  Perhaps the word, being Latin instead of plain English, was adopted so the smart finance guys could convey a sense of “it sounds complicated and it is… you wouldn’t understand.  Just trust us on this one.”

Although there are certain instances where pro-forma adjustments are helpful, too often this word is simply a euphemism for “blatant lie’s and half truths”. The ongoing use of this shenanigan defies explanation. Everyone seems to know the joke and yet they continue to play along.  Maybe, for the docile, polite investors, it’s like when Grandma used to serve you Brussels sprouts as a kid while smiling and telling you “they’re delicious”. You’re not going to tell Grandma that’s BS. You’re just going to eat what’s served. And most investors keep eating what’s served.  Of course, investors are probably just as much to blame.  They hate surprises and love flat, upward sloping lines when graphing company results.

Reading the description for some pro-forma adjustments, they seem to present a kind of alternate reality where the company exists in a fourth dimension, outside the space-time continuum as we know it. They can be forward-looking or retroactive. They can be absolute or relative. They can completely reverse reality or they can be a black hole where misdeeds and misfortunes of all kinds are tucked away from the light of day.  A good buy-side analyst applies a healthy dose of skepticism when she sees the pro-forma descriptor attached to anything.

When a company presents pro-forma numbers as it relates to historical results, they are telling the investment community “This is how we would have performed during the quarter if you exclude the bad weather impact on our sales, the fire that shut a plant for 2 months, the higher energy costs, or the lower sales due to Easter falling on a different day than it did last year.” In other words, if you simply ignore all those pesky, unpredictable vagaries of life, the economy, people’s behavior, and the weather, then we did just fine… steady as she goes.

Usage Note: An analyst might remark to his co-worker: “Man, Netflix results were horrible this quarter! Revenues were down 30%.” To which his less-seasoned colleague replies: “Yea, but if you pro-forma for all those lost subscribers as if they were gone last year, the core business seems to be about flat.”

What??