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I Suggest Groupon Offer Coupons To It's IPO Investors, They're Going To Need Them

Submitted by Reggie Middleton on 09/26/2011 13:53 -0400

This post is an example of what a little investigative reporting
should look like. Let's attempt to recast pop media in the form of a
smart ass blog. First, a glimpese of what's in the news today, as the NYT Deal Book column reports: Accounting Change Cuts Groupon’s Revenue

Groupon
disclosed a major accounting change on Friday, essentially halving its
once-jaw-dropping revenue after it encountered resistance from
regulators with its filing to go public.

Groupon,
the online coupon titan, announced separately that its chief operating
officer of about five months, Margo Georgiadis, had stepped down.

The
changes in the revised filing and the executive departure are likely to
spur additional questions about Groupon, a much-envied rising star in
the constellation of new Internet companies. The company has grown
rapidly, but its ability to sustain that growth, the ways it measures
growth and the eccentric public persona of its chief executive have come
under fire at times.

Despite
those criticisms, and the current turmoil in the stock market, Groupon
is still aiming to go public next month, people briefed on the matter
have said. That offering could value Groupon at more than $15 billion.

The company’s revised filing
for an initial public offering also incorporated portions of a
memorandum sent to employees by the company’s chief executive, Andrew
Mason, that were subsequently leaked to the press. Analysts had
questioned whether that letter ran afoul of a mandatory “quiet period”
for companies seeking to go public.

The
revenue accounting change is Groupon’s second since it filed to go
public in May. Early last month, it removed references to an accounting
metric that critics said misleadingly showed the company turning a
profit.

In
its latest filing, Groupon says that it has restated its financial
results for the last three years “to correct for an error” in the way it
reported revenue. Before, the company reported as revenue all the money
it collected from customers, including cash that was later paid out to
Groupon’s merchant partners.

Now, Groupon is reporting what it calls “net revenues,” which exclude the retailer payouts.

For
example, in a version of the prospectus filed last month, Groupon
reported $1.52 billion in revenue for the first six months of the year.
In Friday’s filing, that number is now called net revenue and is $688
million. The original $1.52 billion figure is now counted as gross
billings.

Groupon’s accounting change is the inverse of what Google
did before its own public debut in 2004. The search giant initially
excluded cash that was shared with distribution partners in its revenue
figures. It later changed its revenue to include those payouts.

Groupon: Accounting Shenanigans That Can Make A Leprechaun Blush! - OR - I Told You Not To Trust These Guys!!!

Social
networking stocks are the current obsession for Wall Street bankers.
Groupon, LinkedIn and Facebook - a trio of Internet darlings, are
absorbing market value and could even eclipse the market value of
internet gaint Google. There are also host of other internet startups
including Pandora (a music streaming service), HomeAway (online
vacation-rentals company) Zynga and PopCap (social gaming sites) that
are planning to test their fortunes at Wall Street. After LinkedIn which
debuted as one the most expensive IPO (yet one of the most successful)
in the American history based on the ratio of its market value to its
yearly sales, Groupon has filed its IPO filings to test the market
appetite for internet start-ups.c

In our June blog post and forensic analysis of Groupon “What Does Groupon and the Matrix Have In Common?” we
contend that the company’s revenues were not an appropriate measure to
compare with its peers for valuation purpose as the company was
overstating its revenues in its books of accounts as the revenue from
Groupon were on gross basis while the appropriate comparable measure was
gross profit which was the amount the company retained after paying its
subscribers. Our contention was valuing the company on price-to-sales
and looking at the “hyper” sales growth would make valuation look overly
optimistic; besides other investment theses that were highlighted –
falling revenue per subscribers, slowing growth rate, the flawed
business model and competitive pressures, investors disconnect between
value and risk, and of course the valuation.

Abstract from our June subscriber-only analysis - Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36):

“Groupon’s revenue consists of the gross amount paid by customers for purchased Groupon while gross profit is the amount that the company retains after paying its merchants
an agreed upon percentage of the purchase price to the featured
merchant. So the comparable number for price-to-sales to use for Groupon
is gross profit, or the fees it collects from merchants, which the
management has correctly stated as the best proxy for the value created
by the company. To put things into perspective, if eBay used the same
math as Groupon does, it would have reported revenues of $61bn instead
of $9bn. The company reported gross profit of $530m over last 12 months.
At $25bn valuation that would put the valuation at 42x “comparable
sales”. To put things in perspective, Google trades at Price-to-sales of
5.8x, Apple at 4.7x, Microsoft at 3.3x, Amazon at 2.6x and Yahoo at
3.4x.“

In
the latest S-1 registration statement, the company has revised its
revenue figures by more than half. The company has restated its 2010
revenues from $713m to $313m while Q1-11 revenues were restated to $296m
from $645m previously. The company has restated its financial results “to correct for an error”
in the way it reported revenue. The revenue accounting change is
Groupon’s second since it filed to go public. The company has also
changed the presentation of certain expenses to be consistent with
reporting revenue. Clearly, such errors and frequent change in the
accounting policies clearly puts strain on the credibility of management
– and that’s putting it lighlty, especially for a company that is
contemplating an IPO, not to mention that such changes are top line
numbers such as revenues. In another blow to Groupon, the company’s COO
Margo Georgiadis is leaving the firm to join back Google.

BoomBustBlog subscribers (click here to subscribe)
who are being pitched this IPO by their all so trustworthy bankers and
brokers should feel free to download our update to the Groupon piece File Icon Groupon Revenue Restated,
and don't forget to show a copy to those who are all so trustworthy.
Speaking of the "Oh so trustworthy", my next post will DROP THE BOMB on
said industry as the guy with a pretty good track record in calling
bank failure updates the post The Next Step in the Bank Implosion Cycle! Oh, those Name Brand Banks are going to get bashed as BoomBustBloggers get enriched!