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[LIP] GroupOn.com ... Opps, The Accountants Made A Slight Error.

edited September 2011 in Off-Topic
What can you say? It was an honest error? If I was betting man, I'd bet that no one is prosecuted.

"Groupon shaved its revenue for the first half of this year to $688 million, from $1.5 billion, in an acknowledgment on Friday of accounting missteps with the Securities and Exchange Commission. Groupon had reported the entire deal coupon as revenue instead of subtracting the merchant's cut. Groupon says in SEC filings that revenue minus merchant fees was always the metric to consider."

http://www.usatoday.com/money/companies/story/2011-09-26/groupon-IPO-in-trouble/50548532/1

Comments

  • edited September 2011
    A couple of thoughts at 5:30 in the AM:

    1. I like Groupon, although the deals of interest have gotten a little thinner in the last 6 months or so.

    2. The "local deal" sites will persist, but there were too many piling on (I believe facebook ended theirs, as did a few others.

    3. My one concern is the "discountification" of things and what effect does that have on industries and smaller businesses; for example, I think Priceline is great, but is there a point where it becomes the dominant force in the travel industry and what does that do to the travel industry?

    Additionally, Groupon has had a remarkable number of these sorts of issues for a fairly high-visibility IPO and it's both a little surprising and a little surprising more action has not been taken (although that's the time we live in, I guess.) Reporting something as large as the deal revenue without the merchant portion taken out is a pretty blatant mistake.

  • I may be in the minority here, but I see this reporting change as storm and fury signifying nothing. Groupon sells cash-value coupons. One can regard these coupons as goods, and there's a cost of acquiring goods, which they reported clearly literally on the next line beneath the revenue figure as "cost of revenue". As the NYTimes observed in its Friday article, Google made the reverse change when it went public - it originally reported revenue net of share given to partners, but later changed that to gross revenue.

    What IMHO matters, and hasn't changed, is that they spend a huge amount on marketing, because they have no protection, no barriers to entry. Those marketing and sales costs swamp their, um, net revenue, and their losses are accelerating. It was always hard to see how this company could improve its situation - it simply burns through cash like a classic dot com company (though the reason is different - Groupon has a real product but it has to spend too much; dot coms typically had no product).

  • Thank you for the link to the NY Times article. Certainly the article as written by USA Today was lacking in details.

    I guess the accounting standards today are so loose, that anything goes. I cannot imagine how you could include another company's revenue as your own in Net Revenue. By the time a filing reaches the SEC, the details are reviewed by the company's treasury and legal departments. While the 2010 and 2011 numbers are unaudited, the prior years were. So the external auditor just signed off on the accounting methodology. But someone of note did notice it, dictating that GroupOn make the accounting change. If it was kosher, they wouldn't have made this change so late in the game (IPO).

    A dozen years back my former company wanted to take some expenses in the hundreds of thousands of dollars for restructuring charges. I was asked to calculate those expenses, as I had been involved with the project's finances almost from inception. But I was unsure if this was allowable, so I decided to research it. I read chapters of some very dry material published by the Association of Independent Accounting Professionals. Well, I can't say that I wasn't warned. I even called AIAP to discuss my findings, and to see if there were other documents that I might review.

    I decided that the expense was in a gray area. I came up with a fair way to calculate the write off expense. Then wrote up a summary of my findings, and I recommended taking the expense as a restructuring charge. My documentation was pretty brief. No one in corporate management wants to read details. But certainly I was prepared to go into complete detail, if I got a call from the internal or external auditors. Not surprisingly I never heard a peep. I heard that at the top level, they were dumping everything they could into the restructuring charges (think kitchen sink analogy), because highly compensated industry financial analysts tend to discount restructuring charges. Or at least they did back then.

    After I left the company, a former colleague told me that they wrote off the entire project to a new restructuring change. I asked if the buildings and plants were still open, and most were. So it was obvious to me that the equipment was still in use, hence the expense was not eligible based on my prior research . The decision was the result of one middle manager wanting to impress a VP with a seven figure write off for the new round of restructuring charges. So much for following generally accepted accounting standards.
  • Reply to @Maurice:

    "I cannot imagine how you could include another company's revenue as your own in Net Revenue. "

    By "Net" Revenue you probably mean Profits (bottom line) which is different than Revenue (top line). Revenue customarily includes everything. Than you subtract expenses out of it (to your vendors, tax etc.).

    In the case of GroupOn, the issue is do you separate the payments to vendors first or later. In the end, it should not make any difference in the bottom line.
  • "Net Revenue" is not exactly the term that Groupon used in its revised filing, but it is darn close. Footnote 1 of its Consolidated Financial Statements (link also in NYTimes article) reads: The Consolidated Financial Statements have been restated for the presentation of revenue on a net basis for all periods presented.

    They're talking about the top line revenue figure here, which has what you're calling top line revenue in parenthesis on that top line, denoted "gross billings".

    The current filing looks like:

    Revenue (gross billings of $1,597,423) $688,105
    Costs and Expenses
    Cost of Revenue $66,522 (the non-merchant costs)
    In its filing a month prior, on its top line it presented:

    Revenue $1,522,746 (substantially identical to the gross billings, above)
    Cost of Revenue $911,699 (merchant costs plus other costs of revenue as above)
    Gross Profit $611,047
    (aside from the other costs, basically the "net revenue" of the earlier filing)
    The numbers aren't perfect matches because numbers are never precise and some editing always gets done, but essentially all you're seeing is that the merchant costs are now netted out in the top line Revenue.

    In either filing, what you saw was merchant costs incorporated into the top line - it's just that in the older filing all costs of the coupons (both merchant costs and others) were netted out to produce Gross Profit. By having a separate line for Gross Profit, this enables Groupon to show its gross revenue as a full fledged line item, rather than as a parenthetical remark about gross billings.
  • edited September 2011
    I did find the link to the filing in the NY Times article. I did scan (review would not be appropriate) the Consolidated Statements of Operations Data as it is restated, prior to posting.

    @Investor I suspect you didn't look at the the filing's consolidated statement. It has a line called 'Revenue'. There is a note besides that word which says '(gross billings of $94, $34,082, $745,348, $135,807 and $1,597,423, respectively)'. Those numbers are in millions. To me they refer to the report prior to the restatement. So they are saying that these numbers were Gross Revenue numbers. The revised revenue numbers are $5, $14,540, $312,941, $58,938, $688,105. I would call these Net Revenue numbers, which means the revenues belonging to their partners have been netted out. That is quite different from Net Profit. I did not mention Net Profit, nor did I confuse this with Net Revenue. While this didn't make a difference to the bottomline, financial analysts do not like to be confused more than necessary. I also believe it is poor accounting and quite misleading to classify someone else's revenue as your own, by taking it as an expense.

    @msf I guess I restated in my own words what you said above. I think you are also are suggesting that the restatement was sloppy, or that you don't like the accounting change. I still believe that the account change is correct. But Net Revenue is a better terminology. How they corrected this was sloppy. To clarify their accounting change, they should have shown two other line items under Revenue which would have detailed the Gross Revenues and the deduction of the Merchant Revenue. It is large enough to be relevant even if they did it right the first time. Certainly having screwed it up, it necessitates in my opinion a detail breakout to help in understanding.
  • edited September 2011
    @msf Probably no one else cares, so I consider this just for you. From the FASB (Financial Accounting Standards Board) decisions. I think the last 2 paragraphs are most relevant to my point.

    June 10, 2009 Board Meeting

    Revenue recognition. The Board discussed three topics that have not yet been addressed in the proposed revenue recognition model: (1) gross versus net presentation of revenues, (2) the combination, segmentation, and modification of contracts, and (3) nonmonetary exchanges.

    Gross versus net presentation of revenues

    When other parties are involved in providing goods and services to an entity’s customer, the entity must determine what amounts to recognize as revenue; that is, whether to recognize revenue in the gross amount collected from the customer or the net amount the entity retains after compensating those other parties for their goods and services.

    The Board decided that the amount an entity recognizes as revenue depends on the identification of performance obligations. In other words, the entity must determine whether its performance obligation is to provide goods and services itself or to arrange for another party to provide those goods and services. The Board directed the staff to further develop application guidance that would help entities to identify performance obligations consistently.

    The Board decided that an entity should disclose separately revenue in the same line of business from (1) providing goods and services itself and (2) arranging for the provision of goods and services. The Board also decided that an entity should disclose the basis for its assessment and any significant judgment in identifying performance obligations when other parties are involved in providing goods and services to the entity’s customer.

    The Board also agreed that if an entity transfers a performance obligation to another party so that the entity is no longer obliged to provide the underlying good or service to the customer, the entity should not recognize revenue for that performance obligation.

    http://www.fasb.org/jsp/FASB/FASBContent_C/ActionAlertPage&cid=1176156235830
  • Investor - thanks. I have gone through some FASB concept statements and FASs, but not in years.

    I think the penultimate paragraph is not especially relevant, because (if I'm reading it right), it requires separate revenue lines for goods and services the company provides and goods and services it simply arranges for. But since all Groupon does is the latter, we're still left with a single revenue line. (Thus, this paragraph appears moot.)

    The main point is that top line revenue is not supposed to include the cost of services that the company (Groupon) is arranging. (That's the last paragraph.) Groupon netted out the cost in both the current and the prior S-1 filing. The only thing it seems they arguably did wrong was call the gross figure "revenue", while still publishing the net revenue but calling it "gross profit". Clearly done so that Groupon could claim a higher revenue figure.

    There are two questions - does the SEC require GAAP accounting in S-1 filings. (Likely, but it's not something I've looked into in a long time.) And was Groupon right in thinking that it could trick some investors by hyping this higher revenue figure. (IMHO, also likely, but this is one item where I think such investors deserve what they get, because the "net revenue" figure was still easy to find and read in the older filing.)


  • Reply to @Maurice: I agree. They caused unnecessary confusion. The end result is the same for profits point of view.
  • Bloomberg has an article discussing in more detail the Groupon's IPO problems. Groupon's chairman made comments this summer that the company "is wildly profitable". The company in its filing asked investors to disregard his comments. Now there is a concern about the amount that GroupOn has to spend to attract email subscribers is costing significantly more than 2010. This is on top of the accounting scandal and losing 2 COO's in 6 months.

    Its possible that the IPO will just be pulled per Ryan Jacob, of the Jacob Internet Fund. Investors who are willing to buy into the IPO are perceived to be getting scarcer. Should it go off successfully, the amount of IPO may be for $3B, which is down from $5B, which is down from $25B.

    http://www.bloomberg.com/news/2011-10-03/groupon-s-stumbles-seen-paring-back-size-of-ipo-as-investor-interest-wanes.html
  • Another article about Groupon whose IPO is expected to go public on Nov 4. Whether it goes off or not is something I'll watch. If it does, I'll be surprised if they raise $10B. Also it will be interesting to see which mutual fund families buy a significant share.

    http://finance.yahoo.com/news/Groupons-fall-to-earth-apf-1850258734.html?x=0&sec=topStories&pos=8&asset=&ccode=
  • This thread was last updated prior to the Nov 4 IPO. So what has happened since?

    Mutual Funds that reported that they own GRPN, as of the end of Nov 2011. None of the holdings exceed 0.52% of their funds.

    Holder Shares
    FIDELITY GROWTH COMPANY FUND 3,302,000
    FIDELITY OTC PORTFOLIO 1,930,900
    FIDELITY MAGELLAN FUND INC 1,523,000
    GOLDMAN SACHS GRWTH OPP FUND 1,165,838
    FIDELITY BLUE CHIP GROWTH FUND 708,900
    Allianz Fds-AGIC Growth Fd 391,900
    Principal Large Cap Growth Fd I 337,120
    FIDELITY PURITAN FUND INC 265,900
    FIDELITY SELECT PORT - TECH 235,600
    FIDELITY ADV GRWTH OPP FUND 212,100

    GRPN opened at $28.00 on Nov 4. The historical high of $31.14 occurred on that first day of trading. The historical low on Nov 28 was $14.58. The stock closed today at $23.51.

    So it has come back since late November, but if you bought GRPN that first day, you'd be roughly losing between $2 and $7.50 per share.

    So how secure is that moat of being number one? Others, who were not considered competitors at that time, are already on their heels looking for market share. One is Bank of America. They are reaching out to their cardholders, offering discounts.

    http://finance.yahoo.com/news/a-new-coupon-source--your-account-statement-.html


  • Should have mention that the IPO went off at $20.
  • Reply to @scott: Got a feeling that Living Social won't have an IPO this year. Or any other year. Good thing Google has a lot of money to waste.
  • edited August 2012
    Just an update. To save you some trouble, the GRPN IPO was at $20 and the stock opened at $28 last Nov. In 9 months the stock has fallen to $5.33 as of 2:53pm EDT today.

    All the signs were there that this was a lousy investment. The CEO hyping the stock during the pre-IPO quiet period against securities rules; the CEO selling a significant amount of stock before the IPO; multiple CFO's leaving in a short period of time; the revenue accounting debacle; and the weak moat and business plan.

    So why didn't I short the stock? For the same reason I didn't short Netflix when last summer, they announced their new pricing strategy, and I listened to people calling in to a talk radio program, saying that they were going to cancel their subscriptions. Netflix was trading around $290 and is now $63 a share. My reason is that shorting stocks is very risky. It is a risk that I don't want to take. So I just watch and laugh.

    * In case you read above this reply, I am the Deleted User, as I posted without logging in.
  • Reply to @Maurice: puts instead of shorting? (obviously not easy, either.)
  • Reply to @scott: I did take a look at the puts last summer for Netflix. But I couldn't pull the trigger. The only time I'm 90% right, is when I don't buy.:)
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