Groupon’s Strikeouts Reveal an Unspoken Truth

http://www.bloomberg.com/news/2011-08-04/groupon-s-strikeouts-reveal-an-unspoken-truth-jonathan-weil.html

by nsimplex • 15 years ago

160 46 15 years ago

bloomberg.com

bartl• 15 years ago

>The B.S. stands for "before strikeouts".

Really. Well I was thinking something else.

nodata• 15 years ago

I think that's why they chose it..

tatsuke95• 15 years ago

The plot thickens. It's no joke when the main-mainstream of business media is writing about your accounting procedures...

Is Groupon going to become a smash hit or implode? Still infinitely excited about this IPO. It's going to be a great story, whichever way it goes.

lambtron• 15 years ago

even though i have my qualms about andrew mason, it seems as if it were the bankers working on the IPO that are doing all they can to get it approved by the SEC so they can earn the fees and to cash out before the public is allowed to invest in groupon. and we are still figuring out if the daily deals model is profitable and sustainable.

adriand• 15 years ago

> and we are still figuring out if the daily deals model is profitable and sustainable.

Well, we're certainly finding out that the daily deals model is profitable for web developers and assorted startups. Hardly a day goes by without hearing about some new Groupon clone, and the number of web developers who are making money from clients who want to build Groupon clones has to be pretty high. It reminds me of a few years back when all our clients wanted to build their own social network and integrate it with their websites.

pbhjpbhj• 15 years ago

From what I've seen now, including being a mark of Groupon's, I think that Groupon amounts mainly to preying on small businesses that don't quite have the nous to realise that it's a bad deal to give up all your profits to Groupon (or whoever) in order to win an enlarged customer base filled with bargain hunters who cost you everytime you serve them. Hyperbole for sure but not that far off I think.

dodo532• 15 years ago

I don't really get why it's a big deal. They have to report the normal net loss, and the amount and categories of things they're excluding is public knowledge so why does it matter if they decide to come up with a possibly not-useful metric - isn't it Invetor-Beware on whether to consider that metric or not?

loganfrederick• 15 years ago

1. The SEC, especially after the financial crisis, is not going to tolerate fanciful accounting shenanigans.

2. Even though it is an "investor-beware" system to some extent, typically the SEC doesn't support blatant misrepresentation of the company, which is what these metrics do, even if elsewhere they are reporting more accurate numbers.

3. A company trying to act this shady on their government filings does not instill confidence that they are any less shady elsewhere in their business.

raganwald4• 15 years ago

Imagine, if you will, a one-hundred page prospectus. One hundred pages of facts twisted beyond all manner of reason, with pie crust promises of castles in the sky. Buried within those pages are the SEC-mandated numbers you need to compare this company to any other company trading on thhe exchange.

Now imagine every company does this, but each in their own way with their own entirely orthogonal way of presenting their hallucinations. Does this make the mrketplace more efficient? More pragmatically, if any such company fails, does this increase or decrease investor trust in the exchange?

The SEC is ultimately responsible for building and maintaining trust in the process. A succession of IPOs where the proper GAAP numbed have been reduced to fine print and footnotes is contrary to their mandate.

dodo532• 15 years ago

ok that makes sense, thanks

ramanujan• 15 years ago

Definitely agree that standardization of financial metrics is highly useful for comparing across companies.

Strongly disagree that the SEC or any government agency can be relied upon for anything related to "trust" in this space. Did Sarbanes-Oxley prevent the financial crisis? The SEC is just about building Maginot Lines. Caveat emptor has and remains the operative guidance for investors.

Private ratings agencies have had a poor track record of late, but they are at least somewhat more reliable in that they aren't completely under the thumb of the US government.

tedunangst• 15 years ago

I believe you meant GAAP numbers, but I thought numbed was also a good word. :)

damoncali4• 15 years ago

You're right. They have to report the "legit" numbers. But - there is a section in the reports with all manner of notes and hand waving that accompany these reports.

It's a tough call. GAAP isn't going to adequately explain the nuance of every business, so notes are appropriate to explain things better.

But, bankers and accountants take advantage of this and twist the notes beyond sane bounds in an effort to make the earnings look good. Taken too far, this behavior can invalidate the accounting reports, making them totally opaque.

There isn't a right or wrong answer here. This example, I think, is pretty silly - as it's not a difficult thing to glean this info from the standard reports. But there are cases where strange accounting practices are good and helpful because underlying business is itself strange.

jeremymims2• 15 years ago

Groupon has more than 100 million subscribers (mostly in America). If we assume that the total available market is another 50 million or so signups in the US, then these loss leader marketing expenses will drop dramatically (no need to offer $10 for a friend that buys a $5 deal).

The attempt of this metric is to explain what their business looks like in another year or so when they've reached some level market saturation. Groupon has treated the deals space as a race (I don't personally agree that it will necessarily pan out this way).

But it's insane not to see that marketing expenses will drop and that they can be comfortably profitable.

joelhaasnoot• 15 years ago

I'm not so sure... Their model is one that throws all deals on to one big pile for a geographic region and they're trying to get newsletter subscribers. Eventually that's not going to interest consumers anymore (there will always be some bargain hunters, but that market is relatively small). They're going to have to add some sort of element to distinguish what you could be interested in to be interesting and competitive. I should be able to say: "I like Chinese, and don't want to spend more than $40 on a nice meal" and get ads that match. They'll need marketing muscle to make that interesting too. I don't subscribe to Groupon because it's all junk I don't wanna buy. Or maybe I just don't have enough expendable income?

raganwald4• 15 years ago

it's insane not to see that marketing expenses will drop and that they can be comfortably profitable.

Look, projections based on assumptions are part of the investing game. And while I appreciate your enthusiasm, the likelihood that you are correct is not the point.

The point is, there is already an existing method of disclosing assumptions and projections for the future, it's called a pro-forma financial statement. Groupon can simply state their assumptions for when their customer acquisition expenses will go away and give us their projection for what they think their financials will look like at that point in time. In the time-honored format that has served many companies before them.

Giving us a new number for what their business looks like now is ridiculous, because there already is a standard way to share their hopes and dreams of what their company will look like in the future. And that has nothing to do with what you or I might think of their assumptions about what might happen in the future.

jeremymims2• 15 years ago

I'm actually not defending this particular accounting method since I expect they've filed proper paperwork that explains all their income, expenditures, profit, taxes, etc.

What I'm defending Groupon against (not that they need me) is the ridiculous pot shots at their business model as of late and that somehow they're trying to scam people (You'll probably see a few show up in the comments today).

They've grown a phenomenal amount of revenue faster than anyone ever has before and they've apparently spent quite a bit of money to acquire e-mail subscribers. Groupon is a stupendous outlier when it comes to all businesses before it and the biggest question people have is whether or not the business is sustainable. When these significant marketing costs go away, this should be a very solid business.

jeffdavis• 15 years ago

"Look, projections based on assumptions are part of the investing game... Giving us a new number for what their business looks like now is ridiculous"

A thousand times, yes!

Investors need baseline, objective, bottom-line numbers to work with. These numbers help potential investors evaluate where the business is at today, and (perhaps more importantly) help current investors evaluate whether the past projections met with reality.

There are plenty of places that companies are able to spin the numbers to tell their story of fabulous fortunes and world conquest. But there are certain places where you have to let the tried-and-true numbers speak for themselves without someone standing in front waving their arms.

It's like going to vegas. It's easy to say: "Hey, I about broke even. Even if I did lose a little money on the tables, I got some free drinks and I had fun this weekend." Sometimes that story is true, and sometimes they are some pretty-darned expensive free drinks. Your bank account will tell the story, and you wouldn't let a casino owner jump in front to "help you interpret" the numbers.

far33d• 15 years ago

Another possible scenario is that their new customers account for a significant portion of revenue. Once they hit the edge of the addressable market, their CPA rises significantly and their revenue goes off a cliff as it becomes harder to acquire new, profitable customers.

There are two ways to read these tea leaves.

damoncali4• 15 years ago

Anyone with a brain will look at the marketing expense numbers and make a bet as to their relevance and size going forward.

Dropping them completely and saying "look - we're profitable if you assume our customer acquisition cost is zero" seems pretty dumb. How, exactly, are we to assume their marketing numbers will drop at all? It is a sales-driven organization, no?

I'm not sure I'd call it slimy, as the article implies. But I would call it irrelevant. It's not like they're extracting some subtlety from the numbers that is not already well described by GAAP.

dagw• 15 years ago

Most groupon subscribers I know (including myself), are super active for the first couple of month after signing up, and then forget all about it. If this is any sort of indication of a more general trend then they'll probably have to keep that marketing expense high for the foreseeable future. Not only to capture new users, but once they reach saturation, they'll have to refocus their marketing towards reminding their older subscribers to come back and keep using them.

shareme• 15 years ago

Yes, but there is a big difference in the Amazon way which was to own the LOSS and report it the SEc way and Groupon's way of actually LYING..

Look back at the Amazon founder statements during the loss years than look at Mason's now..

r00fus• 15 years ago

What's crazy is that they think it's some sort of race when they have no barriers to entry (either natural or fabricated)... so they rush in an stake all this land... what's to keep LivingSocial (backed by Amazon) from just taking it from Groupon (ie, by higher marketing spend or lower margins)?

Groupon as it exists is completely running on vapors and wishful thinking.

atlbeer• 15 years ago

What accounting firm prepared that S-1 with a straight face? They've got some cajones

omaranto• 15 years ago

Oddly enough "cajones" is also a Spanish word meaning drawers (the drawers were you put clothes, not the ones that are clothes). You probably wanted to write "cojones".

sawyer• 15 years ago

Here's an example of a public company using a non-GAAP measurement that makes a little more sense:

For the last few years EA has been including deferred net revenue as the largest item in their non-GAAP numbers. This value reflects the estimated revenue from ongoing online sales of digital goods over the expected lifetime of an online game.

Example: http://investor.ea.com/releasedetail.cfm?ReleaseID=594196 (note the detail they go into as to why they're including the non-GAAP items towards the middle of the release for contrast with Groupon)

megamark16• 15 years ago

So...I'm developing a web application, and once it's built I won't have to spend nearly as much money on development costs as I am right now. Even though the majority of my expenses are development costs, if I exclude those costs from my balance sheet then my net profit is through the roof! INVEST IN ME, I'M SUPER PROFITABLE! (according to Groupon accounting practices)

guildchatter• 15 years ago

After all this negative press, I'm really curious how much of a pop Groupon's IPO will have.

JoeBracken• 15 years ago

Nothing - they are going to make a killing in the IPO regardless. The general public is not paying attention to this detail and the bankers have more money to make by downplaying this press and pumping up the stock.

WillyF• 15 years ago

Oddly enough, there actually is a baseball statistic that takes strikeouts out of the equation. It also takes out home runs. It's called Batting Average on Balls In Play or BABIP. You can see the formula here: http://en.wikipedia.org/wiki/Batting_average_on_balls_in_pla...

BABIP doesn't tell you a ton about a player's overall performance, but it does tell you how lucky they've been if you compare it to their historical BABIP. Some guys have awful years because their skills fall off a cliff (Adam Dunn is in that camp right now). But some player just have terribly unlucky seasons in terms of how defense affects the balls they put in play.

If a player's BABIP is way down (or up), but his line drive rate, strikeout percentage, and home run rates are the same, you can make a good guess that his batting average will regress back towards his historical average.

I'm sure if you told the average baseball fan about BABIP, he or she would call it BS. Yet, it's a great metric for determining whether a player's poor/excellent performance is sustainable.

eavc2• 15 years ago

I'm a big fan of the BABIP against stat for pitchers for the same reason.

It's amazing to see how good a pitcher can look when his fielders are getting to everything only to have him fall of the table when the law of averages kicks in the next season.

corin_• 15 years ago

To give a very rough idea that works, but pitchers can vary so much, for example some of them, when at their best, get a bunch of strikeouts, others will get a bunch of groundouts/DPs. A pitcher who doesn't throw many strikeouts but consistently makes it very hard for a ball to be hit anywhere that isn't an easy play defensively could looka lot luckier than someone who gets a lot of strike outs, but when he does get hit gets hit badly.

int3rnaut• 15 years ago

Here's a hilariously strange link for this discussion-- BABip explained, with Groupon ads plastered about.

http://www.fenwaywest.com/2011-articles/june/sabermetrics-ex...

This part gets off topic but since we're talking SABERMETRICS!!...

I'm not that great of a statistician and truthfully just pay attention to this stuff for fantasy baseball, but I always find that BABip isn't the greatest for hitters, and as great as the data is (for anyone interested fangraphs is a great resource) interpreting this data can be troubling--I mean at the end of the 2008 season people thought Dunn's BABip was an indicator that he'd just fell apart--but he did turn that around for 2 seasons... and I think that was merely a product of him going from the NLwest to the NLeast(do you think the NLeast has that good of collective fielders)--and then to the ALC where he'd square off against more often than not a top tiered defensive team where he's now struggling. I guess my question with BABip how do you interpret luck with decreasing skill level? I've looked at that quite closely trying to look for correlations with age etc, and I can never find anything that shows me that BABip for interpreting upcoming season potential is anything but a crapshoot.

joshklein• 15 years ago

Without more telling numbers around customer behavior, these numbers aren't particularly relevant. What we really need to know is what their customer churn is - what percentage of merchants use the service again? What percentage of consumers use the service again?

If their churn is very low, the adjusted CSOI numbers are interesting to look at (once acquired, customers stick around for awhile and have a positive lifetime value). If their churn is very high, welcome back to the 2001 bubble. The fundamental question about a business at this scale isn't so much whether they are making or losing money, but whether anyone actually wants what they're selling (at a price higher than what it costs to deliver). It really isn't rocket surgery.

Or their business model is to sell irrational exuberance and cash out before anyone notices. That's also a viable business model.

sc68cal2• 15 years ago

Or their business model is to sell irrational exuberance and cash out before anyone notices.

Don't forget that they hid $36.2 million in stock-based compensation as part of this accounting trick.

damoncali4• 15 years ago

"Hid" is a strong word. They're basically trying to sell this idea:

"We won't need much marketing, nor will we be offering significant equity compensation in the future. Acquisitions are a "one-time" thing. Therefore, our long term profitability is looking pretty good."

We, as investors, are welcome to accept that reasoning or not. I think it's pretty weak. Others will disagree. But it's pretty plainly stated. (If anything in a financial report can be considered "plain").

Edit: I'd love to hear why I"m wrong about this from someone who down-voted. Am I missing something?

kirsty• 15 years ago

It is common practice among listed companies to strip out stock-based compensation charges, acquisition-related charges and other non-cash charges as part of their financial information. [1] Their argument for this is generally because these charges are seen as "accounting mumbo-jumbo" by the rest of the world rather than real costs incurred in the running of the business.

I agree that stripping out marketing costs to acquire customers is harder to understand in this way and would seem to be somewhat out of the ordinary.

[1] for example ARM Holdings plc is listed on LSE and NASDAQ and shows its Q2 earnings press release with "normalised" figures quoting as being based on IFRS, adjusted for acquisition-related charges, share-based payment costs, restructuring charges, profit on disposal and impairment of available-for-sale investments and Linaro™-related charges http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...

Smirnoff• 15 years ago

Honestly, Groupon should have taken Google's deal. It seems that the main expense that's killing Groupon is customer acquisition cost. So Groupon needs to be integrated in the business that has zero (well, almost zero) acquisition costs ala Google.

Only then I think Groupon will become a profitable business. Until then I will sit back and watch how Groupon fails. I don't think Groupon has a runway longer than a year.

Groupon’s Strikeouts Reveal an Unspoken Truth

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