Your Ernst & Young Entrepreneurs Of The Year Include the Dude From Groupon, Patrick Byrne
We really don’t pay much attention to the E&Y Entrepreneur thingamajigs because, well, it’s boring. Sure, we like entrepreneurs just fine but c’mon. These guys are filthy rich and successful and E&Y gives them trophies? Is this sort of commercial circle jerk really necessary? Regardless of our personal feelings, the awards are a big deal – Jay Leno hosted this year’s event for crissakes – and the Google News feed for E&Y is constantly clogged with stories about people advancing to the next round of voting like some sort of capitalist March Madness.
Anyway, Casa de Turley officially announced this year’s winners over the weekend and Reid Hoffman and Jeff Weiner, founders of
Facebook for Suits LinkedIn, are your entrepreneuriest entrepreneurs.
In addition to the dynamic duo there are quite a few guys you’ve never heard of that are doing well for themselves including Roger Linquist and Jose R. Mas. See? Never heard of them, have you?
There are also some winners that you have heard of including Andrew Mason, one of the co-founders of virtual clipfest and increasingly looking insolvent Groupon. As well as Patrick Byrne, the founder of Overstock.com. You know, the guy on the Segway. The guy who Sam Antar can’t help to poke and prod every chance he gets. The guy whose company is being sued by seven California counties thanks to a Walmart sticker. The guy who may have had some weirdo trolling a bunch of bloggers’ Facebook friends. Yes, that Patrick Byrne.
But HEY! not every entrepreneur can be squeaky clean. It’s not like he’s Pete Rose or anything. Unless you count this.
There’s Some Fuss About Groupon’s Revenue…or Profits…or Something
You may have heard that the company that encourages people to go broke by saving money, Groupon, filed a S-1 with the SEC last week to go public. It’s been a matter of hot debate as to whether this company is the real deal or simply another house of coupons. One matter that has several people sc is how the company accounts for its revenue. A reader dropped us this note yesterday:
I am not one to bring up accounting questions on your blog as its not your web site’s background [Ed. note: Uh, you mean, accounting?]. I was wondering if you could post one question and make an exception as it relates to Groupon. How on earth did Groupon get away with Gross Revenue treatment and not net revenue? All my accounting friends from the Big 4 and even people who do not work on the Groupon audit at E&Y are stumped. All the literature points to net revenue which means they would not report gross revenue of 900 million but rather 200 million or so which represents their cut. Given how companies are valued on multiple of revenue this seems like a big issue. Any help would be appreciated by your readers.
Now it’s not exactly clear what our reader is referring to (feel free to comment below if you understand) but here’s a clip from the S-1:
Sorry for the squishiness. As you can see, Groupon is reporting revenue for 2010 of over $700 million (not sure about $900 million). They have a cost of revenue (aka cost of goods sold) of over $400 million with a “gross profit” of $279 million. Now, if you’re thinking “gross profit” should be “net revenue” you’re not alone.
From CNBC, there appears to be a debate over semantics:
Groupon accounts for its revenue differently than say eBay, and in a way that some say is misleading to potential investors. The company defines revenue as “the purchase price paid by customers.” Then there’s the issue of “the cost of revenue,” leaving the company with what it calls “gross profit,” which is “the amount of revenue we retain after paying an agreed upon percentage of the purchase price to the featured merchant.”
Here’s the thing: Many companies like eBay […], which also take a fee for transactions, would consider that “gross profit” number a “net revenue number.” UCLA Anderson School’s accounting lecturer Gordon Klein says the S-1 uses terms in a way he’s never used them before, and this unusual accounting tells him that investors should “run from the stock.” Others say this is a non-issue: Wedbush securities analyst Lou Kerner says that the company has done a totally adequate job outlining its accounting approach. Kerner says whether the company reports its revenue before or after direct costs should have zero impact on investors evaluation of the company.
And co-founder Andrew Mason admits that Groupon does things a little differently. Under a section entitled “We don’t measure ourselves in conventional ways” he writes, “we track gross profit [as a metric], which we believe is the best proxy for the value we’re creating.” But that’s all the explanation he gives. Later the filing states, “We believe gross profit is an important indicator for our business because it is a reflection of the value of our service to our merchants.” And under “How we measure our business” things are equally vague:
Gross profit. Our gross profit is the amount that we retain after paying our merchants an agreed upon percentage of the purchase price to the featured merchant. We believe gross profit is an important indicator for our business because it is a reflection of the value of our service to our merchants. Gross profit is influenced by the mix of deals we offer. For example, gross profit can vary depending on the category of product or service offered in a particular deal. Likewise, gross profit can be adversely impacted by offers that we make for the principal purpose of acquiring new subscribers or establishing our brand and building scale in a new market.
Throughout the S-1, the term “gross profit” is used 52 times. If you’re used to reading SEC Filings, the term may throw you off but ultimately the numbers are what theyare and the terms used seem secondary. If you believe “gross profit” is a bullshit metric for this business, fine that’s one thing but if they choose to use slightly unorthodox terminology, does that mean investors should ‘run from the stock’? Personally, I don’t happen to be customer of any of the banks underwriting this thing, so this of little consequence but accountants like to sweat the details, so feel free to make a case either way in the comments.