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[LIP] GroupOn.com ... Opps, The Accountants Made A Slight Error.
1. I like Groupon, although the deals of interest have gotten a little thinner in the last 6 months or so.
2. The "local deal" sites will persist, but there were too many piling on (I believe facebook ended theirs, as did a few others.
3. My one concern is the "discountification" of things and what effect does that have on industries and smaller businesses; for example, I think Priceline is great, but is there a point where it becomes the dominant force in the travel industry and what does that do to the travel industry?
Additionally, Groupon has had a remarkable number of these sorts of issues for a fairly high-visibility IPO and it's both a little surprising and a little surprising more action has not been taken (although that's the time we live in, I guess.) Reporting something as large as the deal revenue without the merchant portion taken out is a pretty blatant mistake.
I may be in the minority here, but I see this reporting change as storm and fury signifying nothing. Groupon sells cash-value coupons. One can regard these coupons as goods, and there's a cost of acquiring goods, which they reported clearly literally on the next line beneath the revenue figure as "cost of revenue". As the NYTimes observed in its Friday article, Google made the reverse change when it went public - it originally reported revenue net of share given to partners, but later changed that to gross revenue.
What IMHO matters, and hasn't changed, is that they spend a huge amount on marketing, because they have no protection, no barriers to entry. Those marketing and sales costs swamp their, um, net revenue, and their losses are accelerating. It was always hard to see how this company could improve its situation - it simply burns through cash like a classic dot com company (though the reason is different - Groupon has a real product but it has to spend too much; dot coms typically had no product).
"I cannot imagine how you could include another company's revenue as your own in Net Revenue. "
By "Net" Revenue you probably mean Profits (bottom line) which is different than Revenue (top line). Revenue customarily includes everything. Than you subtract expenses out of it (to your vendors, tax etc.).
In the case of GroupOn, the issue is do you separate the payments to vendors first or later. In the end, it should not make any difference in the bottom line.
"Net Revenue" is not exactly the term that Groupon used in its revised filing, but it is darn close. Footnote 1 of its Consolidated Financial Statements (link also in NYTimes article) reads: The Consolidated Financial Statements have been restated for the presentation of revenue on a net basis for all periods presented.
They're talking about the top line revenue figure here, which has what you're calling top line revenue in parenthesis on that top line, denoted "gross billings".
The current filing looks like:
Revenue (gross billings of $1,597,423) $688,105 Costs and Expenses Cost of Revenue $66,522 (the non-merchant costs)
In its filing a month prior, on its top line it presented:
Revenue $1,522,746 (substantially identical to the gross billings, above) Cost of Revenue $911,699 (merchant costs plus other costs of revenue as above) Gross Profit $611,047 (aside from the other costs, basically the "net revenue" of the earlier filing)
The numbers aren't perfect matches because numbers are never precise and some editing always gets done, but essentially all you're seeing is that the merchant costs are now netted out in the top line Revenue.
In either filing, what you saw was merchant costs incorporated into the top line - it's just that in the older filing all costs of the coupons (both merchant costs and others) were netted out to produce Gross Profit. By having a separate line for Gross Profit, this enables Groupon to show its gross revenue as a full fledged line item, rather than as a parenthetical remark about gross billings.
Investor - thanks. I have gone through some FASB concept statements and FASs, but not in years.
I think the penultimate paragraph is not especially relevant, because (if I'm reading it right), it requires separate revenue lines for goods and services the company provides and goods and services it simply arranges for. But since all Groupon does is the latter, we're still left with a single revenue line. (Thus, this paragraph appears moot.)
The main point is that top line revenue is not supposed to include the cost of services that the company (Groupon) is arranging. (That's the last paragraph.) Groupon netted out the cost in both the current and the prior S-1 filing. The only thing it seems they arguably did wrong was call the gross figure "revenue", while still publishing the net revenue but calling it "gross profit". Clearly done so that Groupon could claim a higher revenue figure.
There are two questions - does the SEC require GAAP accounting in S-1 filings. (Likely, but it's not something I've looked into in a long time.) And was Groupon right in thinking that it could trick some investors by hyping this higher revenue figure. (IMHO, also likely, but this is one item where I think such investors deserve what they get, because the "net revenue" figure was still easy to find and read in the older filing.)
This thread was last updated prior to the Nov 4 IPO. So what has happened since?
Mutual Funds that reported that they own GRPN, as of the end of Nov 2011. None of the holdings exceed 0.52% of their funds.
Holder Shares FIDELITY GROWTH COMPANY FUND 3,302,000 FIDELITY OTC PORTFOLIO 1,930,900 FIDELITY MAGELLAN FUND INC 1,523,000 GOLDMAN SACHS GRWTH OPP FUND 1,165,838 FIDELITY BLUE CHIP GROWTH FUND 708,900 Allianz Fds-AGIC Growth Fd 391,900 Principal Large Cap Growth Fd I 337,120 FIDELITY PURITAN FUND INC 265,900 FIDELITY SELECT PORT - TECH 235,600 FIDELITY ADV GRWTH OPP FUND 212,100
GRPN opened at $28.00 on Nov 4. The historical high of $31.14 occurred on that first day of trading. The historical low on Nov 28 was $14.58. The stock closed today at $23.51.
So it has come back since late November, but if you bought GRPN that first day, you'd be roughly losing between $2 and $7.50 per share.
So how secure is that moat of being number one? Others, who were not considered competitors at that time, are already on their heels looking for market share. One is Bank of America. They are reaching out to their cardholders, offering discounts.
Comments
1. I like Groupon, although the deals of interest have gotten a little thinner in the last 6 months or so.
2. The "local deal" sites will persist, but there were too many piling on (I believe facebook ended theirs, as did a few others.
3. My one concern is the "discountification" of things and what effect does that have on industries and smaller businesses; for example, I think Priceline is great, but is there a point where it becomes the dominant force in the travel industry and what does that do to the travel industry?
Additionally, Groupon has had a remarkable number of these sorts of issues for a fairly high-visibility IPO and it's both a little surprising and a little surprising more action has not been taken (although that's the time we live in, I guess.) Reporting something as large as the deal revenue without the merchant portion taken out is a pretty blatant mistake.
What IMHO matters, and hasn't changed, is that they spend a huge amount on marketing, because they have no protection, no barriers to entry. Those marketing and sales costs swamp their, um, net revenue, and their losses are accelerating. It was always hard to see how this company could improve its situation - it simply burns through cash like a classic dot com company (though the reason is different - Groupon has a real product but it has to spend too much; dot coms typically had no product).
"I cannot imagine how you could include another company's revenue as your own in Net Revenue. "
By "Net" Revenue you probably mean Profits (bottom line) which is different than Revenue (top line). Revenue customarily includes everything. Than you subtract expenses out of it (to your vendors, tax etc.).
In the case of GroupOn, the issue is do you separate the payments to vendors first or later. In the end, it should not make any difference in the bottom line.
They're talking about the top line revenue figure here, which has what you're calling top line revenue in parenthesis on that top line, denoted "gross billings".
The current filing looks like: In its filing a month prior, on its top line it presented: The numbers aren't perfect matches because numbers are never precise and some editing always gets done, but essentially all you're seeing is that the merchant costs are now netted out in the top line Revenue.
In either filing, what you saw was merchant costs incorporated into the top line - it's just that in the older filing all costs of the coupons (both merchant costs and others) were netted out to produce Gross Profit. By having a separate line for Gross Profit, this enables Groupon to show its gross revenue as a full fledged line item, rather than as a parenthetical remark about gross billings.
I think the penultimate paragraph is not especially relevant, because (if I'm reading it right), it requires separate revenue lines for goods and services the company provides and goods and services it simply arranges for. But since all Groupon does is the latter, we're still left with a single revenue line. (Thus, this paragraph appears moot.)
The main point is that top line revenue is not supposed to include the cost of services that the company (Groupon) is arranging. (That's the last paragraph.) Groupon netted out the cost in both the current and the prior S-1 filing. The only thing it seems they arguably did wrong was call the gross figure "revenue", while still publishing the net revenue but calling it "gross profit". Clearly done so that Groupon could claim a higher revenue figure.
There are two questions - does the SEC require GAAP accounting in S-1 filings. (Likely, but it's not something I've looked into in a long time.) And was Groupon right in thinking that it could trick some investors by hyping this higher revenue figure. (IMHO, also likely, but this is one item where I think such investors deserve what they get, because the "net revenue" figure was still easy to find and read in the older filing.)
Mutual Funds that reported that they own GRPN, as of the end of Nov 2011. None of the holdings exceed 0.52% of their funds.
Holder Shares
FIDELITY GROWTH COMPANY FUND 3,302,000
FIDELITY OTC PORTFOLIO 1,930,900
FIDELITY MAGELLAN FUND INC 1,523,000
GOLDMAN SACHS GRWTH OPP FUND 1,165,838
FIDELITY BLUE CHIP GROWTH FUND 708,900
Allianz Fds-AGIC Growth Fd 391,900
Principal Large Cap Growth Fd I 337,120
FIDELITY PURITAN FUND INC 265,900
FIDELITY SELECT PORT - TECH 235,600
FIDELITY ADV GRWTH OPP FUND 212,100
GRPN opened at $28.00 on Nov 4. The historical high of $31.14 occurred on that first day of trading. The historical low on Nov 28 was $14.58. The stock closed today at $23.51.
So it has come back since late November, but if you bought GRPN that first day, you'd be roughly losing between $2 and $7.50 per share.
So how secure is that moat of being number one? Others, who were not considered competitors at that time, are already on their heels looking for market share. One is Bank of America. They are reaching out to their cardholders, offering discounts.
http://finance.yahoo.com/news/a-new-coupon-source--your-account-statement-.html
http://money.cnn.com/2012/02/08/technology/groupon_earnings/
http://www.washingtonpost.com/business/economy/livingsocial-lost-558-million-in-2011/2012/02/01/gIQAjId3hQ_story.html