
Groupon Restates Revenue, Revenue Fell In Half, COO Exits - chailatte
http://online.wsj.com/article/SB10001424053111903791504576589211214409214.html
======
grandalf
All this finger shaking is misplaced.

Groupon's accounting was legitimate as a management accounting approach, and
any savvy investor should have realized this.

Do you think that Google's acquisition offer was naive to the basic accounting
approach used by the firm? Of course it wasn't.

The knee-jerk criticisms of Groupon's accounting are coming from the same
naive viewpoint as those who demanded mark-to-market accounting practices
(which helped trigger the housing crash).

The use of accounting to measure business valuation is more an art than a
science, and no savvy person should be fooled either by a firm's decision not
to mark the price of an asset to market or to consider ramp-up costs
temporary.

If you're thinking of investing, be sure you understand how the accounting
works and that you are comfortable with why management is doing it that way.

There is no reasonable way to compare two companies in different industries
using a standardized accounting method. Even GAAP is not designed to do that.
It's a nuance of business valuation and ultimately in the case of a company
like GroupOn the valuation is mostly due to what investors are willing to pay.

And yes, it's reasonable for a firm to choose one accounting approach over
another b/c it makes the company easier to manage, or b/c it makes it easier
to show the company's true strengths to the market (aka investors).

~~~
brown9-2
Mark-to-market helped trigger the housing crash? Really?

Or is it that having to mark assets at their current value revealed that much
of the bank's holdings were worthless, which in turn led to the banking crash?

~~~
grandalf
Your proposed explanation is a very incomplete version of what was actually
going on.

It depends on what the purpose of the assets was on a company's books. In some
cases marking to market makes sense and in others it doesn't.

In the case of assets used as reserves (companies are allowed to use
securities as reserves for underwriting risk) marking to market means that
when the underlying commodity has a bubble, the firm suddenly has
significantly greater ability to take risk... then if the asset price falls
the firm is suddenly way over-extended.

If a firm is responsibly underwriting its own risks, the firm's accountants
will determine which assets are suitable and which are not. However in a
heavily regulated, heavily subsidized financial system like the US, firms have
an incentive to take the maximum risk allowed by law, with the expectation of
below market rate loans or other bailout assistance if the practice turned out
(in hindsight) to be too risky.

In the post financial modernization act boom, firms found ways to treat all
kinds of risky assets into reserves, and regulators believed that it was
nearly impossible that housing prices would fall more than a few percent. The
cabal of large firms and regulators squeezed additional returns out of various
schemes for a few years, while shoving significant systemic risk (all built
upon the assumption that housing prices would not fall significantly) into the
corners and tranches of all sorts of complex products.

I'd argue that any complex financial system will ultimately result in
coordination to ignore inconvenient systemic risk.

~~~
jonknee
> If a firm is responsibly underwriting its own risks, the firm's accountants
> will determine which assets are suitable and which are not. However in a
> heavily regulated, heavily subsidized financial system like the US, firms
> have an incentive to take the maximum risk allowed by law, with the
> expectation of below market rate loans or other bailout assistance if the
> practice turned out (in hindsight) to be too risky.

And yet there were systemic failures before the financial industry was heavily
regulated (that's why there is regulation in fact!). It turns out people are
greedy and left alone or regulated will still make risky decisions to try and
squeeze out more money.

~~~
grandalf
The pre-regulation environment was not a modern information economy like ours
is today. In today's world, financial regulation is created at the behest of
industry to create the appearance of responsible management.

Much like a seatbelt made of paper, financial regulations are for appearances
only, as the recent massive crisis should illustrate profoundly.

Financial firms are the top donors to both political parties and are the
recipients of unprecedented handouts. The idea that we have any sort of
meaningful financial regulation at all is absurd.

The best evidence of this is how people nitpick about a tangential but easily
sound-bitable thing like marking to market or the SEC jumping on Groupon after
there's already blood in the water. They bear no impact on the quality and
scope of governmental oversight over the financial system, yet the public is
supposed to believe that tales like these are evidence that oversight is
occurring.

The most charitable argument in favor of the SEC is that it's
understaffed/underfunded and must focus on high profile enforcement actions.
In reality, it's a sham agency whose role is to fool the public into thinking
that the financial services industry is regulated in a way beneficial to the
public.

Even today, the core problems that actually caused the recent crisis have not
been addressed. These are the government programs that artificially elevate
housing prices and the conflicts of interest had by ratings agencies who
depend on the business of those whose products they are intended to rate.

It's important to realize that we live in an economy where 50% of capital is
allocated by the government and where the private/public partnership of the
financial industry and regulators has an extremely large impact on day to day
life.

------
gojomo
This miscalculation of revenue was one of the major issues highlighted by
these two business/accounting professors:

<http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/281> "TRUST NO ONE,
PARTICULARLY NOT GROUPON’S ACCOUNTANTS"

Their two other major concerns:

• Groupon's positive cash-flow is a temporary illusion:

"After downplaying the ACSOI, Groupon has begun touting its 2010 free cash
flow of $72.2 million (operating cash flow of $86.9 million less property and
equipment purchases of $14.7 million). Unfortunately, operating and free cash
flows are driven solely by the fact that Groupon is dragging its feet in
remitting coupon sale payments to its merchants. Had merchants been paid in a
timely fashion, the Company’s free cash flows would likely have been closer to
zero and possibly even negative. Seriously, in a competitive market space, how
long does Groupon believe that it can get away with a 60 day payment delay (or
longer) to merchants? Merchants simply cannot stay in business by providing
services (even discounted ones), two months ahead of payment. Simply put,
Groupon’s free cash flows aren’t real. They come from an unusual (and likely
temporary) vendor financing model, and are not sustainable."

• Groupon's internal controls are inadequate to make their self-reported
numbers credible:

"It is absolutely ludicrous to think that Groupon is anywhere close to having
an effective set of internal controls over financial reporting having done 17
acquisitions in a little over a year. When a company expands to 45 countries,
grows merchants from 212 to 78,466, and expands its employee base from 37 to
9,625 in only two years, there is little doubt that internal controls are not
working somewhere. Any M&A expert will agree. And don’t forget that Groupon
admitted to having an inexperienced accounting and reporting staff. Note that
Ernst & Young supplied an audit opinion about the financial statements but not
about the entity’s internal control system. E&Y instead points out, “We were
not engaged to perform an audit of the Company’s internal control over
financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.” So we ask how have these weak or nonexistent controls affected the
numbers Groupon reports? Can we trust these numbers?"

Groupon's business-professor cofounder, Eric Lefkofsky, has dumped about $382
million of his shares in the prior private financings.

~~~
sk_0919
>> Groupon's business-professor cofounder, Eric Lefkofsky, has dumped about
$382 million of his shares in the prior private financings.

It's important to know what percentage of his total shares he dumped to form
an opinion on this.

~~~
gojomo
Fair enough. Per AllthingsD [1], Andrew Mason has sold about 4 million shares,
for $27 million. Per the latest S-1 [2], it appears Mason retains about 23.5
million shares, so he's sold about 15% of his earlier stake.

Eric Lefkofksy has sold (through related entities jointly owned with his wife)
about 32 million shares, for $382 million. From the latest S-1, it appears he
and his LLCs retain about 129 million shares, so he's sold about 20% of his
earlier holdings.

Interestingly, Groupon also paid out about $27 million in dividends in 2009.

Mason diversifying away from Groupon makes good sense, without sending much of
a negative signal, as his net worth was probably 99%+ in Groupon before the
2009 dividend and then later stock sales. Lefkofsky was already very wealthy
(and thus presumably diversified) from other ventures, so his sales are a
stronger signal that he thinks other investments are more promising.

[1] [http://allthingsd.com/20110602/where-did-groupons-billion-
do...](http://allthingsd.com/20110602/where-did-groupons-billion-dollars-go/)

[2]
[http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...](http://www.sec.gov/Archives/edgar/data/1490281/000104746911008207/a2205238zs-1a.htm)

~~~
mbesto
Ok, so I'm trying to wrap my head around he ultimately gets screwed on this...
Are the people/entities who bought $382mil worth of shares potentially screwed
now that they see the real valuation? Is there any potential for fraud in this
case?

~~~
itswindy
He probably sold to (supposedly) sophisticated investors that thought they'd
scam retail investors later on.

------
physcab
I'm not sure saying "revenue fell in half" is accurate. It looks like they are
clarifying what revenue it actually makes ie, instead of counting the full
value of the coupon as revenue, they are now adjusting revenue numbers to
reflect what their cut of the coupon is. Still sort of shady that they were
quoting the first number to begin with...unless that is totally common, which
I wouldn't know.

~~~
gojomo
You're right, 'fell' is a misleading word and not used by the WSJ in this
case. This is Groupon being forced to follow usual standards for when the
revenue is 'theirs' rather than someone else's. It's a restatement rather than
a period-to-period decline.

~~~
wisty
I think the word financial types used is "revised". As in - Groupon's QX
revenue revised down to half it's original value.

"Fell" means there is some kind of time-dependence. If you already thought
Groupon's accounts were overstated, this isn't news, while falling revenue
would be.

------
danilocampos
"Previously, when it sold a restaurant gift certificate for $10, for instance,
it would book the full amount, even though a portion went to the business
owner."

I keep trying to think of something to say about this. I'm speechless.

What else do you need to know to accept that these guys are dishonest?

~~~
jcampbell1
It is standard GAAP accounting. Amazon reports revenue as the sales price of
the item sold, even though a portion goes to suppliers. Google reports total
revenue from Adsense, even though a portion of the revenue goes to the site
hosting the ad. In my opinion as an ex-finance/accounting guy, the SEC is
wrong in this case, for a few reasons:

1\. The share that the business receives is negotiable and different for
different vendors.

2\. Groupon is the point of sale for the full amount of the revenue.

3\. The merchant receives their share at a different time from when the
Groupon receives the revenue.

~~~
jacques_chester
I disagree.

Groupon is a commissions based business; as I understand it, such businesses
do not count an entire deposit as revenue.

Indeed, most businesses which hold and forward cash on behalf of others don't
count incoming monies as revenues. For example, banks don't book deposits made
by account holders as revenue.

(IANAA, seek professional accounting advice).

~~~
larrys
"Groupon is a commissions based business; as I understand it, such businesses
do not count an entire deposit as revenue."

They take title in the sense that they are paying (although paying late) and
buying a certain amount of product (after they have received orders.) A
commission would be if the same thing happened and the restaurant forwarded x%
of the sale to groupon.

Here's an example. You are a programmer and I send you a customer. The
customer gives you $5000 worth of work. You pay me $500. So you collect the
money and pay me a commission. Other way: I get the $5000 from the customer (I
have the contract with them) and pay you $4500 for what you have done (and
have added risk etc.)

In the case of the first example I don't book $5000 in sales. In the case of
the second example I do book $5000 in sales. (Forget the margins there are
many businesses (supermarkets) that operate on small margins.)

Now, for accounting purposes there could be reasons that I don't want to book
$5000 in sales even though I could (stuff they don't teach in school btw.)
Like if I book more sales then there might be some local gross receipts tax
whereby I have to pay % of sales etc (or something like that). Of course if I
am applying to a bank for a loan maybe I want the higher sales because they
will be more impressed. This by the way is why you need to know as much as you
can because professionals won't always tell you all the things you need to
know to have the best outcome.

~~~
jonknee
> They take title in the sense that they are paying (although paying late) and
> buying a certain amount of product (after they have received orders.) A
> commission would be if the same thing happened and the restaurant forwarded
> x% of the sale to groupon.

No, they work on a commission--the product they sell is the future
services/products of a company who they have agreed to sell on behalf of. It's
like TicketMaster collecting money for an event and then paying the promoter
in a lump sum less agreed upon commissions (and yes, TM only counts their take
as revenue).

Groupon doesn't buy a certain amount of product, they collect revenue and then
pay out based on receipts. No products are purchased, they're simply a third
party affiliate that has an email list and sales force.

> Here's an example. You are a programmer and I send you a customer. The
> customer gives you $5000 worth of work. You pay me $500. So you collect the
> money and pay me a commission. Other way: I get the $5000 from the customer
> (I have the contract with them) and pay you $4500 for what you have done
> (and have added risk etc.)

That's a horrible analogy. A better one is you make an agreement with a
programmer who has a software package. You will sell the software for an
agreed upon price and then split the proceeds 50/50. Your revenue is whatever
your cut is, you're working on commission. This is exceedingly common online
for affiliate programs, the only difference is Groupon approaches the business
about starting the affiliate program just for them.

------
Pewpewarrows
This really begs the question: who the hell is in charge there? How do you not
take one look at your finances and immediately jump on a multi-billion dollar
buyout that a giant internet company offers you? Or did Google get a closer
look at their books and see this coming?

~~~
danso
Only because this is HN where we're all picky: <http://begthequestion.info/>

~~~
cellis
If the phrase is misused 9 times out of 10, then redefine it. That's the
hacker way.

~~~
epicureanideal
If we redefine everything based on what 9 out of 10 people do, what will the 1
out of 10 do that are trying to communicate effectively using precise
terminology that wait... no longer exists for the concept they're trying to
convey.

~~~
rhizome
If 9 out of 10 people use it a particular way, it has already been redefined.
What we're talking about here is the difference between prescriptive and
descriptive linguistics: definition-oriented vs. usage-oriented.

~~~
StavrosK
If you're telling prescriptivists to stop prescribing, aren't you being a
prescriptivist for descriptivism?

Descriptivism lets language evolve. Prescriptivism (people trying to push it
back) is part of that evolution. According to your principles, you should just
accept it as the way the language evolves.

~~~
rhizome
Prescriptivism provides the foundation for descriptivism's point of departure,
and descriptivism provides for the evolution of language. They are part and
parcel to each other.

------
antimora
"The chief operating officer, Margo Georgiadis, is returning to Google" ...
nice way for Google to get an inside into Groupon

~~~
jmjerlecki
This is an interesting hypothesis, certainly not the first thing that came to
my mind, but an interesting thought. Why Google would want to buy Groupon at
this point is beyond me (perhaps for their gigantic sales force and access to
local businesses) but I guess you never know. I don't think there is anyway
Google offers Groupon the amount they previously did.

~~~
bond
Did Google said they're still interested on Groupon?

~~~
r00fus
No, Google is still only likely interested in Groupon's market, which they're
going to get now for much less than $6B.

------
SurfScore
I've always thought Groupon was funny. I could start a business where my sole
business plan was that for every 95 cents you gave me, I would give you a
dollar, no strings attached. I'd probably have a billion in "revenue" even
quicker than Groupon, and I would probably be more profitable too. This might
be a gross oversimplification, but it's still true.

~~~
lunaru
You mean like a Bank CD? What you've described isn't that crazy.

------
maukdaddy
They _really_ should have taken the $8 billion from Google.

~~~
ubi
Perhaps, but this is easy to say now.

You would likely call them fools for leaving $12 billion on the table had they
taken the $8

~~~
biot
They went for the two in the bush when they had one in the hand. It's one
thing to reject $60K when you could go for $200K. It's another to reject $6B
to hope for $20B. Even though the ratios are the same, the maximum downside of
each is considerably different.

Or, as others have speculated, Google got a look at their books and wouldn't
touch it with a ten-and-a-half foot pole; to save face, Groupon claims to not
be interested in the offer.

------
Hyena
Wasn't there a post a few months back claiming the current tch market wasn't a
bubble because during the last bubble firms bent over backwards to claim
revenue and now they don't?

~~~
nateberkopec
Mmmm...claim chowder.

The best part: COO exiting pre-IPO? Are they even trying anymore?

------
_delirium
On the plus side, at least this happened pre-IPO. It'd be a giant legal
shitstorm if they restated revenues _after_ selling shares in an IPO.

------
vaksel
the groupon rise and implosion has been pretty spectacular

~~~
anigbrowl
Indeed. You were among the few skeptics when Goupon rejected Google's buyout
offer, and even you predicted it would take 2 years for the irrational
exuberance to fade: <http://news.ycombinator.com/item?id=1967975>

On the plus side, the company seems to be creating massive consumer surplus;
Mrs. Browl seems to do half her shopping through Groupon. At this stage, the
company doesn't look to be doing any worse than Bank of America or the
Eurozone, so I guess they'll stagger on for a while yet.

Maybe I'll buy a few shares in the IPO. If I have kids and they ask why I
won't buy them a car, I can pull out the share certificates and start waffling
about the Dark Days of Great Recession until they get bored and take a bus.

------
vacanti
Headline could be improved.

While revenue fell in half, gross margin just increased 50%! In other words,
this is just perception and has no bearing on the performance of the actual
business.

Also, headline seems to imply that COO left because "revenue fell in half".
There's no reason to believe that.

~~~
ewams
The article states that "a source" claims she was not treated how a normal
person at that level should be.

------
InclinedPlane
Can someone explain to me why Groupon's margins are so thin/negative? Don't
they basically take half of the revenue that comes in as part of a groupon?
Shouldn't their overhead be little more than the site, plus sales staff, plus
devs? Where does their money go?

~~~
joebadmo
I would imagine it's the employees part. A lot of the speculation about
Google's motivation to buy Groupon was about the sales staff, which has to be
pretty extensive to cover all the businesses in all the cities Groupon
operates in.

~~~
portman
No, in 2010 they spent $263M on customer acquisition, and only $233M on
_everything_ else (rent, servers, employees, bonuses). [1]

[1]
[http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...](http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm#dm79801_selected_consolidated_financial_and_other_data)

~~~
brandong
IIRC, in Groupon definition, customer acquisition is money spent on the sales
teams.

------
dennisgorelik
Would Groupon survive for another year or would it file bankruptcy?

------
8ig8
Has Jason Fried added anything to this discussion after announcing he left the
board? I'd be interested in his take as a past insider.

------
sunchild
Remember this quote from Mason's leaked memo: "We are generating cash, not
losing it — we generated $25M in cash last quarter alone, adding to the $200M
we had before. In other words, we’re doing the opposite of running out of
money."

He chose the words "generating cash" carefully. If it wasn't contrary to his
point, he should have addressed revenue instead.

------
blantonl
A past discussion that seems to be playing out:

<http://news.ycombinator.com/item?id=2980323>

------
mikeryan
How much longer is Andrew Mason going to be in charge at Groupon? His head has
to be on the chopping block at this point right?

~~~
pbreit
For masterfully building the fastest growing company in the history of
business?

------
RexRollman
This IPO is looking more and more like a scam.

------
linuxhansl
I still cannot believe that Google was willing to $6bn! The non-scaling nature
of GroupOn always seemed obvious to me.

------
tlogan
I don't know. As far as I know, Priceline (PCLN) is doing the same thing. Are
they going to push PCLN do the same?

~~~
pbreit
There are rules that govern what amounts should be classified as revenue or
not. I believe in Priceline's case, since it actually buys the flights from
airlines and has loss potential, it makes sense to book the whole fare as
revenue.

------
djiddish98
OT - When I first read this article, the former COO's last name was spelled 3
different ways.

Yes, there are a handful of vowels there, so I can understand how the WSJ
still left one misspelling at the end of the article after editing the
original.

------
jprobert
It's amazing to me how far Groupon has fallen recently. I'm curious to see if
investors file lawsuits against the founders for misappropriation of funds
given that the founders took so much money off the table.

------
callmeed
Is there any possibility that current/past investors in Groupon sue the
company because _they_ invested based on bad financials?

------
itswindy
I smelled a rat, especially when they started to open offices in places like
Bulgaria just for the hype.

------
zmanji
How were their initial steps legal? How can a company file for an IPO with
such bullshit metrics?

~~~
r0fl
You can write anythin you want ad long ad there is a * at the end. In this
crazy IPO market no one reads the fine print.

~~~
Toddward
What makes you say there's a "crazy IPO market?" I can only name four high-
profile tech IPOs so far this year (P, LNKD, FIO, Z) - it seems that most
high-profile tech companies are content to continue closing massive rounds
instead of going public (probably because a lot of them need to generate
better figures to avoid pulling a Groupon, but that's speculation on my part).

And it's precisely because the SEC read the fine print that Groupon continues
to have issues surrounding its IPO. It's their job to read the fine print.

------
krobertson
It is kind of entertaining watching Groupon slowly implode...

~~~
codecaine
I guess Groupons collapse would actually make a pretty neat movie

~~~
krobertson
Someone should get Aaron Sorkin on that

------
marcamillion
Definitely the beginning of the end...if there was ever one.

------
dreamdu5t
Didn't we all see this coming for a long time?

------
clobber
So much for that spectacular business model that revolutionizes local
business. The Groupon pump and dump will make a good chapter in a finance
textbook someday.

------
mkramlich
the technical MBA term for this is "oops!"

------
arctangent
I really don't know how some of these people aren't in jail already. It's as
if everyone forgot that Enron happened.

