

Groupon's PR Boss Suddenly Quit After Just Two Months On The Job - Here's Why - felipemnoa
http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/08/30/businessinsider-groupons-pr-boss-quit-right-before-andrew-mason-sent-out-that-controversial-memo-last-week-2011-8.DTL

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sunchild
Just look at the closing comments in Mason's email to "employees":

"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."

Apparently, the opposite of running out of money is holding cash that you owe
to others. Very sleazy, IMO.

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tptacek
Here's the full quote from the memo:

 _P.S.: I almost forgot to address the nonsense about us running out of money
in the article above. If you apply the same logic used in the article, you’d
have concluded long ago that companies like Amazon and Wal-Mart were running
out of cash too. Both have often had payables far in excess of their cash.
Finance geeks call this a working capital deficit. It’s normal, manageable and
a lot of folks actually believe it’s good thing and would kill to get paid
from their customers long before they have to pay their suppliers. 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._

In that light I don't believe either of us is qualified to assess the
sleaziness of their cash flow management.

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sunchild
Prey tell: what does the full quote add? It's still misrepresenting cash flow
as revenue, if you ask me.

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tptacek
Serious question: what do you think the word revenue means?

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diogenescynic
The way Groupon defines their 'revenue' is the problem. Groupon uses Gross
Revenue Treatment, not net revenue (as eBay does).

They include in their revenue the total price of the offering, but they only
actually see half of that price. For example, if the coupon is sold for $20,
Groupon only actually see $10 of it and they should be accounting their
revenue using the $10, not the $20.

Imagine how much revenue eBay would have if they counted the total cost of the
auction and not just the portion they actually receive?

>Groupon accounts for its revenue differently than say eBay, and in a way that
some say is misleading to potential investors. The company defines revenue as
“the purchase price paid by customers.” Then there’s the issue of “the cost of
revenue,” leaving the company with what it calls “gross profit,” which is “the
amount of revenue we retain after paying an agreed upon percentage of the
purchase price to the featured merchant.” Here’s the thing: Many companies
like eBay [...], which also take a fee for transactions, would consider that
“gross profit” number a “net revenue number.” UCLA Anderson School’s
accounting lecturer Gordon Klein says the S-1 uses terms in a way he’s never
used them before, and this unusual accounting tells him that investors should
“run from the stock.” : [http://goingconcern.com/2011/06/theres-some-fuss-
about-group...](http://goingconcern.com/2011/06/theres-some-fuss-about-
groupons-revenue-or-profits-or-something/)

Also, the fact that Groupon delays paying their merchants is what allows them
to have an operating cash-flow as they even say in their S-1 filing: Our
merchant payment terms and revenue growth have provided us with operating cash
flow to fund our working capital needs. Our merchant arrangements are
generally structured such that we collect cash up front when our customers
purchase Groupons and make payments to our merchants at a subsequent date.

>The second issue is that the accumulation of the merchant payable, has
resulted in a substantial working capital deficit. Essentially, despite being
cash flow positive in the short term, they are not generating enough to cover
their operating expenses like the amounts owing to merchants, salaries, rent
and other costs of running of the business. As such, without additional
financing, they will not be able to meet their obligations. This is extremely
serious and which is why many have analyzed Groupon as being on the brink of
insolvency: [http://www.montrealfinancial.ca/blog/5-notable-
disclosures-i...](http://www.montrealfinancial.ca/blog/5-notable-disclosures-
in-groupons-financial-statements-and-w.html)

~~~
patio11
eBay couldn't meaningfully do Groupon accounting because they do not
beneficially possess the total transaction cost for any length of time. Paypal
accounting gets incredibly complicated, but basically, if A agrees to buy B's
widget on eBay for $100 with $10 of eBay fees, eBay gets the $10 from B's
credit card and, a short period later, A pays B directly through a subsidiary
which Very Carefully (TM) never puts the $100 on eBay's balance sheet or under
their direct control. eBay doesn't call it revenue because _eBay can't spend
that money_.

Groupon _can spend that money_.

There are many businesses which make active use of money that is owed to other
people prior to actually paying it. Warren Buffets owns a lot of insurance
companies. A huge portion of his investment operations are funded by float:
basically, you have to pay him premiums and then he gives them back to you
when (statistically speaking) your house burns down some years later. In the
interim, it's his money, and if he manages float correctly it buys a company
like e.g. Coca Cola on a continuous basis.

Or: take Bingo Card Creator as an example at the waaaaay opposite end of the
scale. Many of my sales come through Google ads. It is basically economically
equivalent to giving them 50% of the purchase price of 50% of my sales -- in
fact, there is a Google pricing option which would make that exactly
equivalent. However, crucially, I do not pay Google contemporaneously with the
sale: like Groupon, our contractual arrangement means I pay them quite a bit
later.

Ads placed on September 4th turn into sales on, statistically, September 5th
which turns into money in my bank account on roughly September 7th. I get
invoiced for the ads on approximately September 25th and then have until
October 20th to pay my credit card prior to paying a penny of interest.

This means that I'm generally holding a couple of thousand of dollars of
"Google's money" in my pockets at any given time. (It goes up and down
depending on what time of the year this is. At the moment, it's a little under
$1.5k off the top of my head.) Crucially, _I can spend it_. I'd have to
replace it prior to summer (when the float tends to evaporate, due to how my
market works), but if I want to replace a laptop or pay for a plane ticket for
a couple months without having to pay credit card interest rates or dip into
savings, I can take the money I was going to pay to Chase to pay Google in
October, and then instead pay Chase in October with the money I was going to
pay them in November, and then... you get the general picture.

~~~
VladRussian
money is just a money and logic can be twisted any way. This is why there is
GAAP, and anytime somebody creatively twist their accounting beyond it there
is train wreck like Enron, Merrill Lynch or Groupon.

>eBay doesn't call it revenue because eBay can't spend that money.

amazing.

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dreamdu5t
Classifying marketing and sales as capital costs tells me everything I need to
know about Groupon.

Dishonest companies use shady accounting practices. No successful or confident
company needs to.

It's like if McDonald's used CSOI to classify their employees as capital
costs... since you know eventually they'll be replaced by robots anyway.

~~~
dreamdu5t
Why is this downvoted? The very definition of a capital cost is a one-time (or
mostly one-time) expense.

Regardless of whether you expect marketing costs to fall in the future, they
are still operating expenses. After all, Groupon can't operate without this
expense.

If marketing is a capital cost, then everything is, and therefor capital cost
becomes a rather useless classification.

Let me put it this way: What _is_ an operating expense for Groupon?

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cletus
tl:dr he and Mason didn't see eye to eye. Msson flew by the seat of his pants
and did things like send out company memos in what is meant to be the SEC
quiet period, against Williams's advice.

Honestly, at this point, I'm just wondering how long it'll be before Groupon
ends up the subject of Congressional hearings and more ridiculous legislation
as the whole thing blows up.

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wccrawford
tl;dr - He won't say. Supposedly inside rumors say the place is a PR
nightmare.

~~~
mechanical_fish
I believe they call this kind of summary "burying the lede".

Better summary: The communications chief left Groupon just before a "leaked"
"internal" memo came out of the company during the SEC quiet period. The
implication is that he may have lost an argument with his boss re: the odds of
going to jail if that memo was published, and decided to flee the scene of the
crime before it went down.

[Note I have no idea if these allegations have any merit. I'm just the
paraphraser here. Though I'm not a cautious one: the original article tiptoes
quite gently around the word _crime_ , but AFAIK that's what it means to
violate an SEC rule.]

~~~
cwp
"The implication is that he may have lost an argument with his boss re: the
odds of going to jail if that memo was published, and decided to flee the
scene of the crime before it went down."

Why so uncharitable? Resigning, rather than participating in something they
believe is wrong, is exactly what people with integrity do. Do we have any
reason to believe that the argument wasn't about, say, whether sending the
memo violates the spirit of the quiet period? Whether current and future
investors would be best-served by the memo becoming public? How to spell
"revenue"?

~~~
tptacek
It's also the case that at the highest levels of executive decision making,
being on the losing side of a major strategic decision often leads to
resigning. If you own PR, and the entire PR strategy is overridden by the CEO,
you might leave simply because it becomes clear that you can't e effective in
that company; the CEO has usurped your role.

That's not a value judgement or anything; it's just life in the big city.

