Groupon IPO Watch: Groupon Versus the Accounting Blogs
Last week was a tough one for Groupon, as Crain's reports "stunning revelations," including the loss of their COO after only five months on the job—Francine McKenna has more on that—and a revised revenue statement: "The larger figure included the merchant's share of Groupon daily deals, which can be 50% or more. The practice raised eyebrows among financial analysts, and Groupon is now reporting as revenue only its own cut of daily deal proceeds." (The company has retained the larger figure as "gross billing.")
There's an interesting backstory about Groupon cutting its reported revenue in half, and those eyebrows that were raised. Back in July, Groupon caused a stir with the use of an odd little metric called "adjusted consolidated segment operating income," or ACSOI, which "adjusted" out significant expenses like "online marketing." It was either a clunky attempt at spin, or a reasonable framing of the company's business model:
As part of their regular analyses, executives should evaluate a company’s current performance separate from extraordinary investment, for whatever reason. That need is why pro forma business statements and non-GAAP accounting exists in the first place. When you lump everything together in the officially approved forms, you risk masking the true dynamics.
But in the wake of the ASCOI mess, two business school profs and accountants, Anthony Catanach and Edward Ketz, found a much more clever trick: the famous "Groupon promise," which obligates Groupon to make good basically anything bad, isn't just good marketing. In Groupon's view, it allowed them to count themselves as the "primary obligor" since they're taking front-line responsibility for the product being sold. But they're still not actually selling the product. As Catanach and Ketz concluded, Groupon is more like an agent or guarantor:
So, despite what the Company says, it is NOT the primary obligor as it contends, since it is NOT the “party responsible to the customer for providing the product or service that is the subject of the arrangement” (EITF 99-19)…the merchants are. Therefore, Groupon is not the primary obligor, but rather a guarantor of sorts!
In other words, since Groupon isn't the primary obligator, it can't count the money going to the primary obligator as revenue, just the money they make for providing the Groupon service. Catanach and Ketz dive into the accounting rules to show how the bulk of what actually defines a "primary obligator" didn't support the company's claim to be it (and they also alerted the SEC). These may be subtle points of accounting, but the effect on reported revenue numbers is, obviously, tremendous.
On some level, it's still just spin. As local forensic accountant Tracy Coenen points out, it doesn't actually change the company's bottom line. Or, as Rocky Agrawal put it, "Although all of the same numbers were available in the previous S-1s, they were much less prominent." But the new numbers soured Coenen:
By reporting revenue properly (much smaller revenue numbers!), Groupon’s precarious financial position and operating strategy are exposed.... [W]hat is clear is that the company’s numbers are absolutely awful once the company reports revenue according to GAAP. An analysis of the correct numbers and associated percentages shows a business that is incredibly expensive to run.
Or as Catanach and Ketz put it:
The analyst community is fixated on the “topline,” particularly for start-up enterprises, where revenue growth can signal future prospects even in the absence of real cash flows.
It's pretty sobering. A couple accountants take a look at Groupon's filing and poof!:
Those internal problems could be cause for concern among investors. According to the Journal, some investors are worried that Groupon's estimated IPO valuation of about $20 billion could be too high, since its initial revenue figures were erroneously inflated.
But either way you look at it, the company's bottom line hasn't changed, and the biggest questions about its model—particularly whether or not it will throttle back on customer acquisition—are basically the same. Coming from the humanities, I'm always a little surprised when these things come down not to hard numbers but to framing.