Groupon is Overstating Revenue by 140%, Should Voluntarily Postpone IPO
Part of the company's stated revenue actually belongs to the merchandiser, but that's not how Groupon is reporting it.
When a merchant sells something on a marketplace like eBay (EBAY), after a customer has paid for the item the merchant keeps a percentage of the sale, and eBay keeps a percentage of the sale. eBay counts its fee as its revenue for the transaction. It counts the aggregate value of the sale as a metric called gross merchandise value, or GMV.
That's not how Groupon does it.
As stated on page 1 of its S-1, and I'm sorry for missing this in Friday's article, Groupon is Effectively Insolvent:
"Our revenue is the purchase price paid by the customer for the Groupon. Our gross profit is the amount of revenue we retain after paying an agreed upon percentage of the purchase price to the featured merchant."
This would be like Expedia (EXPE) or Priceline (PCLN) booking the full purchase price of an airline ticket as revenue.
So Groupon states revenue for Q1 of $644.728 million and gross profit of $270 million. Which means that real revenues for Q1 were $270 million -- the other $374 million of "revenue" is the merchant's share of a Groupon. Groupon's fee as a percentage of the value of Groupons sold has hovered between 38.7% and 41.9% over the past four quarters, which is pretty impressive, albeit of questionable sustainability. Groupon is overstating its real revenue, by 140%. What this does is make its cost structure look that much more problematic.
Its two cost categories are selling, general, and administrative (SG&A), and marketing. When we call Groupon's real revenues for Q1 $270 million, here's how SG&A as a percentage of revenue looks for Groupon vs a few peers and other companies of note.
One might say, "Well, Groupon's a growing company, SG&A as a percentage of revenues will decline over time." Except for the fact that SG&A as a percentage of revenues in Q1 of last year was 37.2%, so it's up 29.1% YoY. In Q2-Q4 it was 87.1%, so perhaps something lower than 66% should be expected over time, but given the nature of the business it's hard to think that it could do better than Expedia or Priceline.
Marketing has been an even bigger cost so far, which is interesting since Groupon would prefer for investors to look at "consolidated segment operating income" (CSOI), which strips out marketing. Marketing costs as a % of real revenue were 77.1% in Q1, up from 20.0% a year ago. Putting the two together and you get the following table.
SG&A and marketing as a percentage of real revenues were 143.4% in Q1, up from 57.1% a year ago, though down from 186.8% in Q2-Q4 2010. A company that spends 40% more on marketing and SG&A than it takes in via revenue, when it has already grown to the scale where it is booking over $500 million a year in real revenue, does not appear to have a viable business model. It certainly does not appear to have any business being a public company at this point.
Attitudes and emotions towards Wall Street are understandably heated after the damage done by the financial crisis. What would be great is if we who have voices in the blogosphere and on Twitter and Facebook could make our questions about Groupon heard, and if Groupon and its bankers would consider voluntarily withdrawing the IPO until Groupon has addressed our concerns and given us more confidence in the viability of the business. That would create tremendous goodwill between the public and Groupon/Wall Street, and go a long way towards healing some of the wounds that still linger.
If you agree with me, I hope you'll consider sharing this piece with anyone who might find it worthwhile. Over the past couple years governments and companies have learned that it's better to have a two-way dialogue with constituents and customers than the top-down decision-making of the past. Maybe it's time that this attitude spreads to Wall Street as well.
Follow Conor on Twitter at @conorsen.
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