{"id":6276,"date":"2011-07-29T10:32:33","date_gmt":"2011-07-29T15:32:33","guid":{"rendered":"http:\/\/www.sequenceinc.com\/fraudfiles\/?p=6276"},"modified":"2011-08-15T22:51:54","modified_gmt":"2011-08-16T03:51:54","slug":"groupon-pay-no-attention-to-the-bottom-line","status":"publish","type":"post","link":"https:\/\/www.sequenceinc.com\/fraudfiles\/groupon-pay-no-attention-to-the-bottom-line\/","title":{"rendered":"Groupon: Pay No Attention to the Bottom Line"},"content":{"rendered":"

\"\"<\/a>In the United States, Generally Accepted Accounting Principles (GAAP)<\/a> are required to be used by public companies so that users of the financial statements can properly interpret results. It makes sense to have a set of rules common to all businesses, such that financial statement users can know what various line items and metrics mean.<\/p>\n

If companies were allowed to make up their own accounting rules and measures, no one would know what the numbers really<\/strong> mean. And that is precisely what Groupon (GRPN)<\/a> is hoping will happen when would-be investors look at the company\u2019s numbers.<\/p>\n

The Business of Groupon<\/strong><\/p>\n

Here\u2019s how Groupon has been doing business. It has been getting tons of consumers to use its service, essentially buying coupons for discounted products and services at local companies. It is common for companies to offer a Groupon for 1\/2 the regular price of a product or service.<\/p>\n

Customers purchase the coupons, and Groupon takes half of the money collected from the sale of the coupons. The other half of the money brought in from the sale of the coupons goes to the actual service provider. The business owner is hoping to entice new customers to the business, with a chance of turning those customers into full-price, long-term customers.<\/p>\n

There are a couple of\u00a0 problems for business owners, however. The business is providing a full-price service or product, but generally getting paid only about 25% of the regular price. Smaller businesses can quickly become overwhelmed if too many Groupons are sold. And it isn’t clear that offering a Groupon actually reaches people who try out the company and then become long-term customers. (i.e. There are lots of bargain-hunters out there who will never return to the business after they use the Groupon.)<\/p>\n

The concept behind Groupon may be a good one from a business standpoint. Groupon facilitates the transaction between the business and the customer, and takes a cut of the money. But it has been an extremely expensive business to run. Groupon has been hemorrhaging money trying to get more consumers to use their service.<\/p>\n

The IPO and the Numbers<\/strong><\/p>\n

Groupon is heading toward an initial public offering of shares of stock, and hoping to have a market capitalization around $20 billion.<\/p>\n

Groupon had revenue of $713 million in 2010, and expenses of $1.126 billion in 2010, for a net loss of more than $413 million<\/strong>. The first quarter of 2011 doesn’t look much better. Revenue of $645 million is obviously a faster pace than 2010, but expenses were $759 million, still leaving the company well in the red.<\/p>\n

In order to deflect attention from the fact that Groupon is nowhere close to being profitable on an annual basis, the company has fabricated a measure it calls \u201cadjusted consolidated segment operating income,\u201d or adjusted CSOI<\/strong>.\u00a0 What, you ask, is this adjusted CSOI? It is basically a measure that excludes the company\u2019s expenses.<\/p>\n

Which expenses are being excluded from the calculation to make the company look more successful?<\/p>\n

Adjusted CSOI is operating income of our two segments, North America and International, adjusted for online marketing expense, acquisition-related costs and stock-based compensation expense. Online marketing expense primarily represents the cost to acquire new subscribers and is dictated by the amount of growth we wish to pursue.<\/strong> Acquisition-related costs are non-recurring non-cash items related to certain of our acquisitions. Stock-based compensation expense is a non-cash item. We consider Adjusted CSOI to be an important measure for management to evaluate the performance of our business as it excludes certain non-cash expenses and discretionary online marketing expenses that are incurred primarily to acquire new subscribers. We believe it is important to view Adjusted CSOI as a complement to our entire consolidated statements of operations.<\/p>\n

The big one is marketing costs. And once you look at the numbers, you see why Groupon wants you to ignore those marketing costs:<\/p>\n