Limitations of Nonfinancial Metrics Reported by Social Media Companies

Abstract

Publicly traded companies in the U.S. are required by the Securities and Exchange Commission (SEC) to file annual and quarterly financial statements (form 10-K and form 10-Q respectively). The Management Discussion and Analysis (MD&A) section of these reports, as per SEC requirements, should include the identification and discussion of nonfinancial performance metrics that are critical to management and important to investors. This paper examines a set of common nonfinancial metrics reported by some well-known social media companies. These metrics include such quantities as number of registered users, monthly average users, and number of unique visitors. The definition and use of metrics such as these have gained increased importance as the recent stratospheric market valuations of a number of social media companies seem to be supported by them, as opposed to more traditional measures, such as profitability. This paper points to a number of limitations of these reported metrics, including that: * What a metric actually measures may lie in the details of how it's calculated; that is, relying on the name of the metric to indicate its meaning may be an error. * Many of the metrics reported are inexact but the companies reporting them do not specify ranges of uncertainty around these point estimates. * Important nonfinancial metrics (e.g., user demographics and customer churn rates) may simply not be reported at all. Typically, corporate nonfinancial metrics are not audited as is financial data. The contribution of this paper is in providing investors and other interested parties with a better understanding of the meaning and limitations of nonfinancial metrics reported by social media companies. Further, in highlighting some problematic issues in the current reporting of these nonfinancial metrics, we hope to raise interest in improving MD&A reporting standards. [ABSTRACT FROM AUTHOR]