Chronically accounting challenged coupon* carrier, Groupon, has found a new Chief Accounting Officer and they've followed the methodology most notably employed by PwC – poaching a KPMG partner: Groupon Inc said on Monday it appointed Brian Stevens chief accounting officer as the online daily deal company grapples with a string of accounting controversies. Stevens will step […]
Recently, some high profile companies have been going public. Leading up to the big day, all kinds of people get ants in their pants because, contrary to what some of you believe, going public is AWESOME. There are roadshows, CNBC hype, and typically you get to ring a bell. Pretty sweet. Unfortunately, there are all […]
I have some doubts about this tip actually coming from the real Joe Del Preto but on the off chance it is (it was signed as such), maybe he would care to explain? I attempted to reach out to ask if he might suggest some other companies whose financial statements we should check out and, […]
On Tuesday, we jumped on the bandwagon with a few others that have suggested Groupon CFO Jason Child find something else to do with his time. You see, things haven't panned out so well for the company as far as financial reporting goes. Their original S-1 filing got a hearty laugh from everyone and then, […]
Last Friday, Groupon announced that some of their numbers weren't exactly up to snuff. This didn't come as much of a surprise to the likes of Grumpy Old Accountants and others (read: everyone) who weren't exactly sold on metrics such as Adjusted Consolidated Segment Operating Income ("Adjusted COSI"). There have been questions about Groupon's financials […]
The Wall St. Journal reports: Groupon Inc. GRPN +3.84% said it was revising lower the financial results it reported for its fourth quarter, after discovering the company had to set aside more money for customer refunds. The online-coupon site, which went public in November, said its auditor, Ernst & Young, discovered a "material weakness in its […]
Our favorite accounting fusspots, Tony Catanach and Ed Ketz have responded to the response of Groupon's CFO Jason Child who refuted the Grumpies' claims that the company's 4th quarter numbers weren't worth the paper they were printed on. Staying true to form, Tony and Ed pick apart Child's arguments against their arguments (without actually stating […]
Maybe! The Wall St. Journal reports that the “site isn’t cancelling its initial public offering […] but is reassessing the timing for an IPO on a week by week basis,” because some people have gotten spooked by this big, scary economy. Okay, things are actually pretty frightening out there but Bloomberg’s sources say that the company also “needs time to address regulators’ questions, including possible revisions to a controversial accounting method used in its filing.” But all this – or insolvency, for that matter – isn’t any cause for concern since this just like a couple postponing a wedding. They just need more time. [WSJ, Bloomberg]
Technically, we should say as of June 30, 2011, as the company had $376 million in current assets and $680 million in current liabilities for a negative working capital of $304 million. In accounting terms that’s known as notveryfuckinggood. Henry Blodget doesn’t want to freak anyone out but if things continue as they have been, this could end up being a helluva problem:
Companies can operate with a working capital deficit as long as they have another source of cash to cover the bills as they come due. Right now, Groupon has this source of cash: rapidly growing Groupon sales. As long as Groupon sells enough new Groupons in one quarter to pay all the bills it racked up in the prior quarter, it will not need additional cash. But if the company’s growth stumbles, or if competitive pressure leads to Groupon’s gross profit margin getting squeezed, look out. Under those scenarios, the company may not be able to sell enough new Groupons to pay off its old bills, and then it will face a serious cash crunch.
In a June 2, 2011 SEC filing, Groupon admitted the metric was creative to say the least. “Our use of Adjusted CSOI has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP,” they said. Some of the die-hard tin foil hat anti-IFRS brigade (I count myself as one of them) might feel the same way about other “alternative,” non-GAAP accounting methods but I digress.
ACSOI did wonders for Groupon’s numbers. It turned a 2010 operating loss of $420,344,000 into a positive $60,553,000, turning Groupon’s luck in its favor to the tune of $481 million. All well and good if investors can actually rely on those statements but didn’t the very idea of ACSOI self-proclaim that it was not to be relied upon? So how the hell did it end up in Groupon’s S-1?
Hence, a furious debate — along with much internal tension — within Groupon about what to do. At first, in another S-1 amendment, the company backed away from using ACSOI as a “valuation metric.”
But that was apparently not enough for the SEC or anyone else, so Groupon’s top managers finally thought it best to rid itself of the term entirely. That will happen next week, sources said.
And, in coming weeks, sources added, the company will be filing additional financial information about both its growth and costs, which will undoubtedly also be put under a microscope by the media, investors and regulators.
Probably good for everyone involved. Things are complicated enough using metrics we all pretty much agree upon, no reason to start pulling accounting tricks out of our hats.
According to Bloomberg, Groupon’s operating income and other accounting
trickery habits are being studied by the U.S. Securities and Exchange Commission, part of a routine review of the site’s IPO. Nothing out of the ordinary there.
But Groupon seems pretty transparent about the unreliability of their methodology. I guess this is to say “don’t rely on this information, we’re kind of making some of these numbers up” so investors can’t say they weren’t warned.
Check out this June 2, 2011 SEC filing:
Our use of Adjusted CSOI has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• Adjusted CSOI does not reflect the significant cash investments that we currently are making to acquire new subscribers;
• Adjusted CSOI does not reflect the potentially dilutive impact of issuing equity-based compensation to our management team and employees or in connection with acquisitions;
• Adjusted CSOI does not reflect any interest expense or the cash requirements necessary to service interest or principal payments on any indebtedness that we may incur;
• Adjusted CSOI does not reflect any foreign exchange gains and losses;
• Adjusted CSOI does not reflect any tax payments that we might make, which would represent a reduction in cash available to us;
• Adjusted CSOI does not reflect changes in, or cash requirements for, our working capital needs; and
• other companies, including companies in our industry, may calculate Adjusted CSOI differently or may use other financial measures to evaluate their profitability, which reduces the usefulness of it as a comparative measure.
Because of these limitations, Adjusted CSOI should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. When evaluating our performance, you should consider Adjusted CSOI alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
Better yet, AQPQ explains the math behind ACSOI:
Groupon acknowledges that it is losing money when profits and losses are measured in accordance with Generally Accepted Accounting Principles (GAAP). The firm claims, however, that its profits and losses are more meaningfully measured by a metric they call Adjusted Consolidated Segment Operating Income (ACSOI).
How does this number differ from profits and losses that are measured in accordance with GAAP? ACSOI apparently includes all of the revenues, but only some of the expenses, that are recognized by GAAP. By excluding certain significant expenses, Groupon manages to convert its losses into profits.
So what is the SEC going to find? Accounting methods already confessed to by the perps? Big deal.
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.
Josh Stevens of Chicago was done with his corporate audit job. The glamour of cube farm life had lost its allure and lucky for him, a challenge that only an accountant could embrace.
He decided that he would accept the challenge from Internet sensation du jour Groupon to live on coupons for an entire year, “I had done corporate auditing for a year, and I decided I didn’t want to sit in a cubicle every day. I thought I’d go back and get more education, and right as I started working on those applications, this fell in my lap.”
“This” includes traveling all over this great land, living off of coupons but there are a few rules that could make things difficult for Stevens including:
• “Stevens can’t use or even touch money.”
• “He’s allowed only five visits from family and friends, with each visit lasting less than a day.”
• “Strangers, fans and supporters may donate a place to crash for the night, a car ride or plane ticket.”
So how does Josh handle not being able to have his skin touch cold hard cash and more or less being celibate (his girlfriend can’t visit him) for an entire year?
“It’s the logistics. It’s really hard to plan in advance for anything. You don’t know how to get from place to place. You don’t know where you are going to be so it’s hard to plan where you will go and who will give you rides.” Of course his ability to be a “cross between Anthony Bourdain, who is trying new things, and MacGyver, who has to be resourceful,” has proven helpful (e.g. getting manicures) as has his willingness to rely on the kindness of strangers (one couple let him stay with them for two weeks).
However, there was one instance where his adventurous nature backfired, “I kind of overdid it with a yoga class I did in Washington, D.C. I don’t know much about yoga. I think I just overstretched. I was fine that day. And the next day and then a day after that, all of my muscles tensed up, and I struggled with it for a few weeks.”
Despite this setback, Josh is plugging along and we’re rooting for him to win the $100k if completes the challenge. Hopefully he’ll spend some of the winnings on his girlfriend and maybe give yoga another shot.