Last Updated Oct 25, 2011 12:44 PM EDT
But, as always seems to be the case with Groupon, appearances can be deceiving. Even as its pre-IPO road show is underway, some academics say that Groupon is technically insolvent (note that insolvency is different from being out of business). And there are new questions about the company's claimed valuation, even at less than half of what it was a few months ago. (A senior equity analyst at Morningstar thinks the company is worth closer to $5 billion, not the $10.1 billion to $11.4 billion that its current IPO plans call for.) Between analyses by BNET and PrivCo.com, a private company analyst firm, here's a closer look at what's actually going on.
Woops, sorry, nothing left for the shareholders
Anthony Catanach, an associate business professor in the School of Business at Villanova University, and Ed Ketz ,associate professor of accounting in the Smeal College of Business at Penn State, explain on their blog, Grumpy Old Accountants, that Groupon is technically insolvent because the company's most recent report shows negative equity for the shareholders:
Our prediction that Groupon has a high probability of failure remains intact.Groupon also displays the results if the IPO goes as hoped for in the last column "Pro Forma as Adjusted." If a serendipitous IPO transpires, then shareholders' equity becomes $464 million and financial leverage drops to "only" 64%.There are other glaring issues to consider in that recent amended S-1. The only reason Groupon looks as though it is nearly breaking even now is because of "slashing marketing spending late-quarter for pre-IPO window dressing," as PrivCo noted.
Restatement went far beyond using net revenue
If that didn't jump out at you, don't feel badly. Groupon is the only pre-IPO company I've seen to report quarterly results in such a way as to cover over details of what is actually going on. Yes, it does show numbers by quarter, but only revenue and income/loss. Groupon provides no other details explicitly other than in cumulative 3-month, six-month, nine-month, and annual results.
Furthermore, when Groupon restated its numbers, it did more than start reporting a version of net revenue rather than claiming gross receipts, which included the massive amounts of money owed to merchants, as revenue. Here's a side-by-side comparison of the old six-month statement of operations and the restated one (click to enlarge):
Cost of revenue went down because the large amount of money owed to merchants was taken out of the equation. However, marketing costs shot up by $53.4 million while SG&A (overhead expenses) dropped by $44.3 million. There was apparently a lot of juggling, and, by the looks of it, an attempt to minimize the actually marketing expense, possibly by shifting a large chunk into SG&A. (The SG&A number had looked unusually large all along.)
Here's what really happened last quarter
Because the restatement didn't go back and fix all previous reports, it's impossible to reconstruct an accurate set of quarterly results from the S-1s. However, you can get a real look at what happened last quarter (click to enlarge):
As PrivCo pointed out, at the same time, Groupon saw a first: sequential quarter revenue growth of only a single-digit percentage.
Although Groupon focuses on cumulative customers -- another bit of numeric misdirection -- it does mention report cumulative repeat customers as well. Subtract cumulative repeat customers from total cumulative and you should have the new customers added per quarter.
Even though it has begun to slow, the addition of customers per quarter is still impressive. However, it's important to realize that Groupon has a significant turnover in customers. If you assume that each new customer represents at least one deal sold in a quarter, you can treat them as a lowest possible percentage of deals (Groupons, in the company's terminology) sold per quarter. As such, getting new customers has become increasingly important to the company's financial well being, as the graph below shows.
Again, this is the smallest percentage they can represent. In short, unless Groupon continues to acquire new subscribers and convert them into customers, the bottom falls out of the business. Given the cash flow issues, that's not good.
As a number of merchants who have used Groupon have told me, the company may make the deal sales up front, but it spreads payments out over the months a deal is good for. That provides built-in financing from the merchants. It's the basis of how the company continues to have cash to operate. As PrivCo noticed, short-term liabilities ballooned by $75 million between the second and third quarters, even though there was only $33 million in additional revenue. Cash owed to merchants is $465 million, up from $392 million the previous quarter, and cash on-hand grew by only $18 million.
Groupon is in an IPO race for its survival. The company's costs of marketing are far too high and it can't do without the growth, which fuels cash on hand, that spending provides. Without a large cash influx that the IPO would provide -- assuming that most of the money went to the company and not insiders, as has happened previously -- management faces serious challenges to how it can keep the company going.
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- COO Runs, Doesn't Walk, as Groupon Restates Revenue
- Groupon Is Back on the IPO Track to Hit the Cash Trough
- Volatility in Management, not Markets, Gets Groupon to Hold Its IPO
- Groupon Might Be Fine, If Only Its Customers Weren't Burning Out
- What Groupon's CEO Didn't Tell His Employees in That Memo