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Groupon Lost $100 Million in Q1, Has Weak Spot in Business Model


However you want to slice it, Groupon lost $100 million in the first quarter. Here's how a potential weakness in its business model could affect the company long term.


One of the rebuttals Groupon critics have received is that Groupon had positive "net cash provided by operating activities" in 2010 and Q1. Let's take a quick look at that. This is at the bottom of page 57 on the S-1:

For the three months ended March 31, 2011, our net cash provided by operating activities of $17.9 million consisted of net loss of $113.9 million, offset by $23.9 million in adjustments for non-cash items and $107.9 million in cash provided by changes in working capital and other activities. Adjustments for non-cash items primarily consisted of $18.9 million in stock-based compensation expense, $1.9 million in depreciation expense on property and equipment and $5.7 million in amortization of intangible assets, partially offset by $3.4 million in deferred income taxes. The increase in cash resulting from changes in working capital activities primarily consisted of a $121.2 million increase in our merchant payables, due to the growth in the number of Groupons sold, and a $36.2 million increase in accrued expenses and other current liabilities primarily related to online marketing costs incurred to acquire subscribers and operational expenses such as payroll and benefits, customer refunds and costs associated with customer loyalty and reward programs. These increases were partially offset by a decrease in operating cash flow due to a $22.5 million decrease in accounts payable, due to the timing of invoices received and paid, a $16.0 million increase in accounts receivable, a $8.3 million increase in prepaid expenses and other current assets and a $3.9 million increase in other assets and liabilities.

This gets to the heart of issues I addressed on June 3 in Groupon Is Effectively Insolvent (the massive merchant payables liability it reports, $290 million as of Q1) and on June 6 in Groupon Is Overstating Revenue by 140%, Should Voluntarily Postpone IPO (the way it accounts for revenue, which overstates revenue that passes the "smell test" by 140%). Because, for now at least, merchants accept Groupon's model of holding onto their cash for up to 60 days, Groupon books the entire purchase of a Groupon, including the merchant's share, as revenue, and the merchant's share of revenue flows through the balance sheet to the merchant payables line item. This money acts as a free line of credit, or commercial paper if you want to think of it that way, though there's no way for it to "roll" the line of credit over and over again -- it's going right to the merchants within 60 days. It's a potential weakness in the business model long-term because a competitor could tell merchants, "We'll offer you the same pricing terms as Groupon but pay you back within 7 days," but at the moment it's a perk for Groupon.

That being said, acting like this is a healthy measure of profitability is nonsense. However you want to slice it, Groupon lost $100 million in Q1.

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