

HN: What's the difference between EBITDA & 'regular' profitable? - marcamillion

I noticed Jim, CEO of Rev3, said that they were EBITDA profitable.&#60;p&#62;Does that mean they are profitable before paying taxes?&#60;p&#62;I know if it was another company, and they have debt and interest payments - then it could mean that they were profitable based on expenses and revenues from operations, but not including interest payments + taxes.&#60;p&#62;But given we are talking about a web based company, that likely doesn't have debt - what could he be referring to aside from taxes?&#60;p&#62;Thanks.
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nostrademons
There's depreciation and amortization as well. This could mean that Rev3 has
one-time asset purchases (eg. servers, patents, TV licensing deals) that it is
still writing off, and it would be profitable if it didn't have to depreciate
those assets.

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marcamillion
This is something I never quite fully understood. So as they depreciate those
assets over time, that goes against their profits?

Why would a company want to do this? Is it just for tax purposes?

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nostrademons
It's for accounting purposes, so that companies are all measured by the same
yardsticks. It's not that they _want_ to do this - it's that they're
_required_ to, under GAAP, at least if they have public investors.

Imagine that companies were not required to amortize capital expenditures over
the life of the equipment. Then imagine that you have two gigantic web
companies, each big enough to require thousands of servers. Company A rents
their servers from Amazon.com through EC2. Company B builds their own
datacenter.

Company A's earnings are straightforward: take their revenues and then
subtract out the fees they pay for hosting (and all the other stuff, like
salaries, licensing, etc.) Company B, however, has this massive cash hit in
the first year, and then pays _nothing_ (well, except for power, cooling,
etc.) in subsequent years. If they weren't required to amortize their CapEx,
Company B would look drastically worse than Company A in year 1, and then
drastically better for all subsequent years, even though they do the exact
same thing. Investors would be misled into investing in Company A, and then
complain when Company B's earnings shot up once they no longer report their
cap-ex.

Ask an accountant for more details.

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marcamillion
That is an AWESOME explanation.

Thank you. I had the gist, but I guess I was focusing on the IT in EBITDA
rather than the DA - because I forgot about the massive CapEx they have to do
initially.

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jwang815
EBITDA is a loose term. That number can be calculated many ways including top-
down (starting with revenue) or bottom up (starting with net income). And
analysts can fudge the number further by including/excluding certain accounts.
But all in all, EBITDA stands for Earnings Before Interest Taxes Debt and
Amortization. The reason EBITDA is a figure analysts look at is because it
relates to "true" profit of the company without polluting it with non-
operating revenues/expenses.

