

Groupon’s Strikeouts Reveal an Unspoken Truth - nsimplex
http://www.bloomberg.com/news/2011-08-04/groupon-s-strikeouts-reveal-an-unspoken-truth-jonathan-weil.html

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WillyF
Oddly enough, there actually is a baseball statistic that takes strikeouts out
of the equation. It also takes out home runs. It's called Batting Average on
Balls In Play or BABIP. You can see the formula here:
[http://en.wikipedia.org/wiki/Batting_average_on_balls_in_pla...](http://en.wikipedia.org/wiki/Batting_average_on_balls_in_play)

BABIP doesn't tell you a ton about a player's overall performance, but it does
tell you how lucky they've been if you compare it to their historical BABIP.
Some guys have awful years because their skills fall off a cliff (Adam Dunn is
in that camp right now). But some player just have terribly unlucky seasons in
terms of how defense affects the balls they put in play.

If a player's BABIP is way down (or up), but his line drive rate, strikeout
percentage, and home run rates are the same, you can make a good guess that
his batting average will regress back towards his historical average.

I'm sure if you told the average baseball fan about BABIP, he or she would
call it BS. Yet, it's a great metric for determining whether a player's
poor/excellent performance is sustainable.

~~~
eavc
I'm a big fan of the BABIP against stat for pitchers for the same reason.

It's amazing to see how good a pitcher can look when his fielders are getting
to everything only to have him fall of the table when the law of averages
kicks in the next season.

~~~
corin_
To give a very rough idea that works, but pitchers can vary so much, for
example some of them, when at their best, get a bunch of strikeouts, others
will get a bunch of groundouts/DPs. A pitcher who doesn't throw many
strikeouts but consistently makes it very hard for a ball to be hit anywhere
that isn't an easy play defensively could looka lot luckier than someone who
gets a lot of strike outs, but when he does get hit gets hit badly.

~~~
eavc
True, but again, it's about variation from that individual's norm. A
groundball pitcher will naturally have a good BABIP relative to others. If one
year it's abnormally high for that person's history, though, it doesn't
necessarily reflect an improvement in skill, though often these kinds of
upticks in luck result in huge contracts.

*fixed a typo

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joshklein
Without more telling numbers around customer behavior, these numbers aren't
particularly relevant. What we really need to know is what their customer
churn is - what percentage of merchants use the service again? What percentage
of consumers use the service again?

If their churn is very low, the adjusted CSOI numbers are interesting to look
at (once acquired, customers stick around for awhile and have a positive
lifetime value). If their churn is very high, welcome back to the 2001 bubble.
The fundamental question about a business at this scale isn't so much whether
they are making or losing money, but whether anyone actually wants what
they're selling (at a price higher than what it costs to deliver). It really
isn't rocket surgery.

Or their business model is to sell irrational exuberance and cash out before
anyone notices. That's also a viable business model.

~~~
sc68cal
_Or their business model is to sell irrational exuberance and cash out before
anyone notices._

Don't forget that they hid $36.2 million in stock-based compensation as part
of this accounting trick.

~~~
kirsty
It is common practice among listed companies to strip out stock-based
compensation charges, acquisition-related charges and other non-cash charges
as part of their financial information. [1] Their argument for this is
generally because these charges are seen as "accounting mumbo-jumbo" by the
rest of the world rather than real costs incurred in the running of the
business.

I agree that stripping out marketing costs to acquire customers is harder to
understand in this way and would seem to be somewhat out of the ordinary.

[1] for example ARM Holdings plc is listed on LSE and NASDAQ and shows its Q2
earnings press release with "normalised" figures quoting as being based on
IFRS, adjusted for acquisition-related charges, share-based payment costs,
restructuring charges, profit on disposal and impairment of available-for-sale
investments and Linaro™-related charges [http://phx.corporate-
ir.net/External.File?item=UGFyZW50SUQ9M...](http://phx.corporate-
ir.net/External.File?item=UGFyZW50SUQ9MTAxMTA1fENoaWxkSUQ9LTF8VHlwZT0z&t=1)

~~~
VladRussian
Groupon stripping out "discretionary online marketing expenses that are
incurred primarily to acquire new subscribers” is akin to airline stripping
out fuel costs as "discretionary expenses that are incurred primarily to
acquire new miles".

Anyway, for example, during its last years, the well known large company i
worked at, was steadily posting near neutral quarters on non-GAAP, excluding
one time charges, basis. The only thing is that each quarter there would be at
least a one "one time charge" that would result in the quarter being deep in
red. Not surprisingly at all if one understands that the life and business in
particular is just a sequence of one time events :)

(there is of course a very reasonable use of one-time charges - if company
generates a profit, then good accountants would dig out some "one time
charges" that would allow to decrease/avoid the profit tax)

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sawyer
Here's an example of a public company using a non-GAAP measurement that makes
a little more sense:

For the last few years EA has been including deferred net revenue as the
largest item in their non-GAAP numbers. This value reflects the estimated
revenue from ongoing online sales of digital goods over the expected lifetime
of an online game.

Example: <http://investor.ea.com/releasedetail.cfm?ReleaseID=594196> (note the
detail they go into as to why they're including the non-GAAP items towards the
middle of the release for contrast with Groupon)

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megamark16
So...I'm developing a web application, and once it's built I won't have to
spend nearly as much money on development costs as I am right now. Even though
the majority of my expenses are development costs, if I exclude those costs
from my balance sheet then my net profit is through the roof! INVEST IN ME,
I'M SUPER PROFITABLE! (according to Groupon accounting practices)

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tatsuke95
The plot thickens. It's no joke when the main-mainstream of business media is
writing about your accounting procedures...

Is Groupon going to become a smash hit or implode? Still infinitely excited
about this IPO. It's going to be a great story, whichever way it goes.

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atlbeer
What accounting firm prepared that S-1 with a straight face? They've got some
cajones

~~~
omaranto
Oddly enough "cajones" is also a Spanish word meaning drawers (the drawers
were you put clothes, not the ones that are clothes). You probably wanted to
write "cojones".

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jeremymims
Groupon has more than 100 million subscribers (mostly in America). If we
assume that the total available market is another 50 million or so signups in
the US, then these loss leader marketing expenses will drop dramatically (no
need to offer $10 for a friend that buys a $5 deal).

The attempt of this metric is to explain what their business looks like in
another year or so when they've reached some level market saturation. Groupon
has treated the deals space as a race (I don't personally agree that it will
necessarily pan out this way).

But it's insane not to see that marketing expenses will drop and that they can
be comfortably profitable.

~~~
raganwald
_it's insane not to see that marketing expenses will drop and that they can be
comfortably profitable._

Look, projections based on assumptions are part of the investing game. And
while I appreciate your enthusiasm, the likelihood that you are correct is not
the point.

The point is, there is already an existing method of disclosing assumptions
and projections for the future, it's called a _pro-forma financial statement_.
Groupon can simply state their assumptions for when their customer acquisition
expenses will go away and give us their projection for what they think their
financials will look like at that point in time. In the time-honored format
that has served many companies before them.

Giving us a new number for what their business looks like _now_ is ridiculous,
because there already is a standard way to share their hopes and dreams of
what their company will look like in the future. And that has nothing to do
with what you or I might think of their assumptions about what might happen in
the future.

~~~
jeremymims
I'm actually not defending this particular accounting method since I expect
they've filed proper paperwork that explains all their income, expenditures,
profit, taxes, etc.

What I'm defending Groupon against (not that they need me) is the ridiculous
pot shots at their business model as of late and that somehow they're trying
to scam people (You'll probably see a few show up in the comments today).

They've grown a phenomenal amount of revenue faster than anyone ever has
before and they've apparently spent quite a bit of money to acquire e-mail
subscribers. Groupon is a stupendous outlier when it comes to all businesses
before it and the biggest question people have is whether or not the business
is sustainable. When these significant marketing costs go away, this should be
a very solid business.

~~~
raganwald
I get that you are defending their business model, thanks. The whole point of
starting a business is to lose money today building an asset that will make
money tomorrow, so what's wrong with that?

In days of yore, companies would not go public until they were actually making
money, but tail fins fell out of favor, and conservative investing went with
it.

All I am saying is that they should use standard financial tools when
promoting their business to investors. I am sure that plenty of people,
possibly yourself included, will be just as bullish on their prospects.

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dodo53
I don't really get why it's a big deal. They have to report the normal net
loss, and the amount and categories of things they're excluding is public
knowledge so why does it matter if they decide to come up with a possibly not-
useful metric - isn't it Invetor-Beware on whether to consider that metric or
not?

~~~
raganwald
Imagine, if you will, a one-hundred page prospectus. One hundred pages of
facts twisted beyond all manner of reason, with pie crust promises of castles
in the sky. Buried within those pages are the SEC-mandated numbers you need to
compare this company to any other company trading on thhe exchange.

Now imagine every company does this, but each in their own way with their own
entirely orthogonal way of presenting their hallucinations. Does this make the
mrketplace more efficient? More pragmatically, if any such company fails, does
this increase or decrease investor trust in the exchange?

The SEC is ultimately responsible for building and maintaining _trust_ in the
process. A succession of IPOs where the proper GAAP numbed have been reduced
to fine print and footnotes is contrary to their mandate.

~~~
ramanujan
Definitely agree that standardization of financial metrics is highly useful
for comparing across companies.

Strongly disagree that the SEC or any government agency can be relied upon for
anything related to "trust" in this space. Did Sarbanes-Oxley prevent the
financial crisis? The SEC is just about building Maginot Lines. Caveat emptor
has and remains the operative guidance for investors.

Private ratings agencies have had a poor track record of late, but they are at
least somewhat more reliable in that they aren't completely under the thumb of
the US government.

~~~
raganwald
So long as we understand that I never suggested that prudent investing relies
on the investor performing their own careful appraisal of the investment _or_
relies on a regulatory agency--of any kind--screening investments.

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bartl
>The B.S. stands for "before strikeouts".

Really. Well I was thinking something else.

~~~
nodata
I think that's why they chose it..

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guildchatter
After all this negative press, I'm really curious how much of a pop Groupon's
IPO will have.

~~~
JoeBracken
Nothing - they are going to make a killing in the IPO regardless. The general
public is not paying attention to this detail and the bankers have more money
to make by downplaying this press and pumping up the stock.

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Smirnoff
Honestly, Groupon should have taken Google's deal. It seems that the main
expense that's killing Groupon is customer acquisition cost. So Groupon needs
to be integrated in the business that has zero (well, almost zero) acquisition
costs ala Google.

Only then I think Groupon will become a profitable business. Until then I will
sit back and watch how Groupon fails. I don't think Groupon has a runway
longer than a year.

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lambtron
even though i have my qualms about andrew mason, it seems as if it were the
bankers working on the IPO that are doing all they can to get it approved by
the SEC so they can earn the fees and to cash out before the public is allowed
to invest in groupon. and we are still figuring out if the daily deals model
is profitable and sustainable.

~~~
adriand
> and we are still figuring out if the daily deals model is profitable and
> sustainable.

Well, we're certainly finding out that the daily deals model is profitable for
web developers and assorted startups. Hardly a day goes by without hearing
about some new Groupon clone, and the number of web developers who are making
money from clients who want to build Groupon clones has to be pretty high. It
reminds me of a few years back when all our clients wanted to build their own
social network and integrate it with their websites.

~~~
pbhjpbhj
From what I've seen now, including being a mark of Groupon's, I think that
Groupon amounts mainly to preying on small businesses that don't quite have
the nous to realise that it's a bad deal to give up all your profits to
Groupon (or whoever) in order to win an enlarged customer base filled with
bargain hunters who cost you everytime you serve them. Hyperbole for sure but
not _that_ far off I think.

~~~
ahi
In the first web bubble, there was a lot of investment into companies giving
stuff away at a loss. Eventually we all got too smart for that. Now there is a
lot of investment into companies getting other companies to give stuff away at
a loss. Just as unsustainable, but it'll drag out a bit longer before we all
figure it out.

