7 ms·

Groupon’s Strikeouts Reveal an Unspoken Truth

160 points by nsimplex 15y ago

bartl 15y ago
>The B.S. stands for "before strikeouts". Really. Well I was thinking something else.
- nodata 15y ago
  I think that's why they chose it..
tatsuke95 15y 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 15y 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 15y 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 15y 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.
    - ahi 15y ago
      In the first web bubble, there was a lot of investment into companies giving stuff away at a loss. Eventually we all got too smart for that. Now there is a lot of investment into companies getting other companies to give stuff away at a loss. Just as unsustainable, but it'll drag out a bit longer before we all figure it out.
dodo53 15y 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 15y 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.
- raganwald 15y 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.
  - dodo53 15y ago
    ok that makes sense, thanks
  - ramanujan 15y 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.
jeremymims 15y 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 15y 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?
- raganwald 15y 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.
atlbeer 15y ago
What accounting firm prepared that S-1 with a straight face? They've got some cajones
- omaranto 15y 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".
deleted 15y ago
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sawyer 15y 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 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 15y 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 15y ago
After all this negative press, I'm really curious how much of a pop Groupon's IPO will have.
- JoeBracken 15y 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 15y 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_play 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.
- eavc 15y 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_ 15y 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.
    - eavc 15y ago
      True, but again, it's about variation from that individual's norm. A groundball pitcher will naturally have a good BABIP relative to others. If one year it's abnormally high for that person's history, though, it doesn't necessarily reflect an improvement in skill, though often these kinds of upticks in luck result in huge contracts. *fixed a typo
joshklein 15y 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.
- sc68cal 15y 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.
  - damoncali 15y 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?
    - deleted 15y ago
      [deleted]
    - sc68cal 15y ago
      In addition to requiring a full reconciliation to GAAP, the SEC’s disclosure rules for nonstandard financial metrics require companies to provide “a statement disclosing the reasons why the registrant’s management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant’s financial condition and results of operations.” Frankly, if the SEC (who makes the Keystone Kops look serious) is giving them a hard time about this non-standard financial measure, it is not simply that investors "are welcome to accept the reasoning or not"
Smirnoff 15y 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.

160 points by nsimplex 15y ago

bartl 15y ago

>The B.S. stands for "before strikeouts". Really. Well I was thinking something else.

nodata 15y ago
I think that's why they chose it..

tatsuke95 15y 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 15y 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 15y 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 15y 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.
  - ahi 15y ago
    In the first web bubble, there was a lot of investment into companies giving stuff away at a loss. Eventually we all got too smart for that. Now there is a lot of investment into companies getting other companies to give stuff away at a loss. Just as unsustainable, but it'll drag out a bit longer before we all figure it out.

dodo53 15y 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 15y 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.
raganwald 15y 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.
- dodo53 15y ago
  ok that makes sense, thanks
- ramanujan 15y 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.

jeremymims 15y 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 15y 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?
raganwald 15y 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.

atlbeer 15y ago

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

omaranto 15y 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".

deleted 15y ago

[deleted]

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sawyer 15y 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 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 15y 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 15y ago

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

JoeBracken 15y 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 15y 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_play 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.

eavc 15y 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_ 15y 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.
  - eavc 15y ago
    True, but again, it's about variation from that individual's norm. A groundball pitcher will naturally have a good BABIP relative to others. If one year it's abnormally high for that person's history, though, it doesn't necessarily reflect an improvement in skill, though often these kinds of upticks in luck result in huge contracts. *fixed a typo

joshklein 15y 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.

sc68cal 15y 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.
- damoncali 15y 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?
  - deleted 15y ago
    [deleted]
  - sc68cal 15y ago
    In addition to requiring a full reconciliation to GAAP, the SEC’s disclosure rules for nonstandard financial metrics require companies to provide “a statement disclosing the reasons why the registrant’s management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant’s financial condition and results of operations.” Frankly, if the SEC (who makes the Keystone Kops look serious) is giving them a hard time about this non-standard financial measure, it is not simply that investors "are welcome to accept the reasoning or not"

Smirnoff 15y 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.