Groupon keeps moving the goalposts, leaving investors scratching their heads

Groupon reported its first quarterly earnings as a public company this week and blew away its numbers — in the sense that it stopped reporting key numbers investors need to assess the health of its business.

Based on generally accepted accounting principles (GAAP), the daily-deals company continues to lose money. But the bigger concern for investors is Groupon keeps changing how it wants to be measured and hiding metrics that point toward a deterioration of its business.

This is not new for Groupon; it was a hallmark of its IPO process. When I discovered a way to estimate its refund losses (which I believe is a big risk for Groupon), it redefined the metric. When it reported 3Q numbers shortly before the IPO, it redefined the metrics that it had been using, making all previous comparisons invalid.

And in this first quarterly report, it’s even less transparent. The company stopped reporting the number of email subscribers, the number of Groupons sold, the number of people who bought Groupons in the quarter, the number of new customers, the number of merchants who sold Groupons, and the number of customers who had purchased more than one Groupon. All of the cohort data that was available in the S-1 form that allowed us to see how Groupon was trending in established markets like Chicago and Boston (which was already trending down) was eliminated. Even the total amount it owes merchants for Groupons sold was hidden in another metric.

Groupon has been heavily criticized for its rapid headcount growth. It stopped reporting that, too.

The company came out with two new metrics: “active customers” and “trailing twelve month gross billings per average active customer.” The active customers isn’t a bad metric, if Groupon had provided it on a quarterly basis. But it didn’t, so we can’t see a meaningful trend. The trailing twelve months number is so convoluted, even I can’t explain it clearly. But again, Groupon shows how it games numbers. The company wanted to report a big number, so it engineered a metric to do it. If it’s going to report anything on that basis, it should be based on revenue, not gross billings.

Groupon continues to spend heavily on marketing. In 4Q, it spent $156 million on marketing. But without knowing how many new customers signed up, we don’t know how effective all that marketing was. We do know it was 30.9 percent of revenue. Although that’s a big drop from 92.9 percent in 1Q, it’s still very high.

Another troubling trend is that Groupon’s cost of revenue as a percentage of revenue keeps climbing. For a company as mature as Groupon, this should be stable or declining. It increased from 13.7 percent in 4Q10 to 17.2 percent in 4Q11.

On its earnings call, Groupon told investors that they shouldn’t focus on the “take rate,” the percentage of a Groupon’s value that Groupon gets to keep. That is utterly ridiculous because it’s one of the most important numbers for investors. Based on LivingSocial’s full year numbers, I estimate that its take rate was 32 percent. Long term, I expect the number to be 10 to 15 percent. That would mean even greater losses with Groupon’s current cost structure.

There was some good news for Groupon. Revenue increased in 4Q by 17.7 percent versus a 9.6 percent increase in 3Q. This is likely an indication of seasonality due to holiday shopping and is very common in retail. Groupon offered guidance that in 1Q 2012, it will show revenue growth of 0.7 percent to 8.6 percent.  But I’m skeptical; in the 1Q 2011 revenue dropped 5.6 percent from 4Q 2010.

Even if it does meet those numbers, it will be a sign that Groupon is a mature retail business not the hypergrowth business the market is valuing it as. If Groupon performs like a mature retail business, it is vastly overvalued.

Rocky Agrawal is an analyst focused on the intersection of local, social, and mobile. He is a principal analyst at reDesign mobile. Previously, he launched local and mobile products for Microsoft and AOL. He blogs at http://blog.agrawals.org and tweets at @rakeshlobster.


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