OK so it probably isn't fair to "group" Groupon with Enron, Tyco, and Parmalat to name just three companies who have had accounting scandals in the last decade, but really, where do Directors and their advisors/auditors draw the line at creative accounting and potential misrepresentation of financial information.
Groupon Inc is looking towards an IPO and filed its Form S-1 on 2 June with the SEC. The form is the draft prospectus for the business with all sorts of legal, accounting and business information about the company, which is expected to be used by potential investors to determine whether they will invest or not.
What, you measure profit before marketing costs and, for non-cash charges read, share based payments! Well, forgive me for being naive, but do you really expect people to ignore probably one of your biggest overheads - marketing costs?
If you run an internet business, you'll know that one of the biggest spends is the cost of acquisition of new clients, whether it is through pay per click channels, affiliates or even TV and Radio. To ignore these when describing your business performance is ludicrous. Try telling that to the bank manager, explaining you have made money as he forecloses on you because you have run out of cash from excessive marketing spending - after all that is pretty much what happened to Cobra Beer.
So, what does the "addjusted CSOI" mean in real numbers?
Groupon Inc is looking towards an IPO and filed its Form S-1 on 2 June with the SEC. The form is the draft prospectus for the business with all sorts of legal, accounting and business information about the company, which is expected to be used by potential investors to determine whether they will invest or not.
Early on in the prospectus is a letter to potential stockholders from Andrew D Mason, one of the founder's of Groupon. Included in the letter is the following comment:
"We don't measure ourselves in conventional ways. There are three main financial metrics that we track closely. First, we track gross profit, which we believe is the best proxy for the value we're creating. Second, we measure free cash flow—there is no better metric for long-term financial stability. Finally, we use a third metric to measure our financial performance—Adjusted Consolidated Segment Operating Income, or Adjusted CSOI. This metric is our consolidated segment operating income before our new subscriber acquisition costs and certain non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term growth."
Lets take each performance measure in turn:
"We don't measure ourselves in conventional ways. There are three main financial metrics that we track closely. First, we track gross profit, which we believe is the best proxy for the value we're creating. Second, we measure free cash flow—there is no better metric for long-term financial stability. Finally, we use a third metric to measure our financial performance—Adjusted Consolidated Segment Operating Income, or Adjusted CSOI. This metric is our consolidated segment operating income before our new subscriber acquisition costs and certain non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term growth."
Lets take each performance measure in turn:
- Gross profit - fair enough, but it depends on how one creates it
- Free cash flow - often used by unprofitable companies but that makes sense with their business model, subject to their caveat in risks "our operating cash flow and results of operations could be adversely impacted if we change our merchant payment terms or our revenue does not continue to grow", in other words, if they have to change terms they could hit a problem. TechCrunch highlighted this issue back in June pointing out that Google's payment terms of 80% in 4 days was more than twice as fast as Groupon's.
- Adjusted CSOI - and they hit us with the biggie - they measure profit before "new subscriber acquisition costs and certain non-cash charges"!
What, you measure profit before marketing costs and, for non-cash charges read, share based payments! Well, forgive me for being naive, but do you really expect people to ignore probably one of your biggest overheads - marketing costs?
If you run an internet business, you'll know that one of the biggest spends is the cost of acquisition of new clients, whether it is through pay per click channels, affiliates or even TV and Radio. To ignore these when describing your business performance is ludicrous. Try telling that to the bank manager, explaining you have made money as he forecloses on you because you have run out of cash from excessive marketing spending - after all that is pretty much what happened to Cobra Beer.
So, what does the "addjusted CSOI" mean in real numbers?
Under the Groupon performance measure they made an adjusted CSOI of $60m for the year ended June 2010 and nearly $82m for Q1 2011. A fantastic improvement in performance for a business only 30 months old. But under normal (GAAP) accounting rules the results are a net loss of $420m and $117m respectively. In other words they wanted investors to ignore $480m of costs in 2009/10 and nearly $200m in the first quarter of this year.
I suppose Andrew D Mason's final comment before he signed off his letter says it all "Our path will include some moments of brilliance and others of sheer stupidity." Well for me, measuring your business performance by ignoring one of your largest costs has to be, by any measure, sheer stupidity!
I suppose Andrew D Mason's final comment before he signed off his letter says it all "Our path will include some moments of brilliance and others of sheer stupidity." Well for me, measuring your business performance by ignoring one of your largest costs has to be, by any measure, sheer stupidity!
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