By George Wilson
In our last post we explored the relationship between metrics and nonGAAP measures, and how a metric that is computed with GAAP numbers is not a non-GAAP measure. In this post we explore other important aspect of metrics, including explaining to investors how they relate to financial performance and also relating them to performance.
When companies present metrics, such as “average monthly users,” these measures can look impressive, but in many business models the relationship between the metric and financial performance measures, such as revenue growth or profitability, may not be clear. This leads the CorpFin staff to write comments such as this:
1. Refer to your response to comments 9 and 11. Please clarify on page 76 that there is currently no material difference in revenue per active rider for ridesharing and shared bikes and scooters. Also disclose the substance of your response relating to the reasons this metric is useful to investors. Similarly, disclose on page 77 the substance of your response relating to the reasons why the number of Rides taken by each cohort for each year is useful to investors.
Another important aspect of disclosing metrics, particularly in MD&A, is to discuss the linkage between the metric and financial performance, as these three comments illustrate:
11. Please quantify the number of riders comprising each cohort for each year presented and the retention by cohort by year. Also, discuss the extent to which the available cohort data evidences any material known trends or uncertainties. For example, it appears that for the 2015 cohort, retention grew at a lower percentage from 2016 to 2017 compared to 2015 to 2016. Finally, tell us how your calculation involving number of rides, as opposed number of riders, is a measure of “retention”
6. Please ensure that you provide an indication of the magnitude of each of the factors you identify that caused material changes in revenue. Address the following:
Clarify how the increase in average MAUs, which you attribute primarily to international user growth that monetizes at a relatively low rate, contributed to the increase in revenue. Revise to include the change in international revenues in order to provide context to this statement; and
Revise to quantify the increase in the number of advertisements delivered, as well as the increase in the number of advertisers and the increase in demand from existing advertisers that each contributed to such increase. In this regard, we note that the number of ad impressions and the number of advertisers are among the variables that impact your growth in monetization affecting your performance, based on your discussion on page 61.
Refer to Item 303(a)(3) and Instruction 4 to Item 303(a) of Regulation S-K and Section III.D of SEC Release No. 33-6835.
Results of Operations, page 71
2. We note your response to prior comment 6. Your discussion and analysis should provide insight into the extent to which historical financial information is indicative of future results. In order to provide further context to the nature of your historical growth in light of the early stage of your monetization efforts, please quantify how both the number of advertisements placed by new advertisers and the increased number of advertisements from existing advertisers have impacted the change in revenue. Refer to Item 303(a)(3)(iii) of Regulation S-K and Sections III.A and III.D of SEC Release No. 33- 6835.
Lastly, if you do use metrics extensively, it is important to remember that MD&A is written through the eyes of management. So it’s important to consider whether to disclose those metrics that are important to management. The SEC made this point in this comment:
Key Metrics, page 57
3. You state in the risk factors section on page 28 that you regularly review metrics to "evaluate growth trends and the depth and quality of engagement of Pinners" in addition to the number of active users. Please disclose the key metrics that management uses to manage the business for each period presented. You state that in the past, you relied on metrics such as "saving a Pin" and "clicking and other activities." As part of your response, clarify whether you still measure these activities. Refer to Section III.B of SEC Release No. 33-8350.
As always, your thoughts and comments are welcome!