Groupon filed the third amendment to its IPO filing this afternoon to change how it reports revenue.
Specifically, it is separating out gross billings (the amount it collects) from net revenue (what’s left after it pays Groupon merchants their cut). Previously, it called gross billings “revenue.”
So, for instance, the company is now reporting revenue of $392.6 million for the second quarter of 2011, on gross billings of $909.2 million. Previously, it claimed $878 million.
The new filing also includes most of Andrew Mason’s August 25 email to employees, which rebutted criticisms against the company. That memo leaked to the press, and the SEC started asking questions about how that happened. This filing makes it public.
This is the third time the company has amended its filing. Last month, Groupon removed the controversial accounting method it called “Adjusted Consolidated Segment Operating Income,” or ACSOI, which didn’t count marketing expenses.
Back in July, the company amended its filing to be more up-front about its losses, and to caution investors not to pay attention to remarks from cofounder Eric Lefkofsky that the company would be “wildly profitable.”
In case you missed it, here is the portion of Mason’s letter that now appears in the prospectus:
1. GROWTH IN THE CORE BUSINESS
Thanks to a tremendous effort by our sales team, August in the U.S. is shaping up to be a pivotal month. It appears that will revenues grow by about 12% over last month (which is a lot), while we cut our marketing expenses by 20% in the same period.
The way Groupon spends on marketing is unique in three ways:
1. We are currently spending more than just about any company ever on marketing—in Q2, we spent nearly 20% of our net revenue on marketing, while a typical company spends less than 5%. Why do we spend so much? The simple answer is “because it works.” But that’s only part of what makes our situation special.
2. Our marketing—at least the customer acquisition marketing that we remove from ACSOI—is designed to add people to our own long-term marketing channel—our daily email list. Once we have a customer’s email, we can continually market to them at no additional cost. Compare this to Johnson and Johnson, McDonald’s, or most other companies. If I’m a Johnson, and I’m trying to sell you a box of Band Aids, I have to keep spending money on commercials and magazine ads and stuff to remind you about how sweet Band Aids are, even after you’ve bought your first box. With Groupon, we just spend money one time to get you on our email list, and then every day we email you a reminder of the sweetness of our metaphorical Band Aid. There is no cost of reacquisition—that’s unusual (and we created ACSOI to point that out). If Johnson wanted to follow the Groupon strategy, he would have to start a free daily newspaper about bandages and then run Band Aid ads in it every day.
3. Eventually, we’ll ramp down marketing just as fast as we ramped it up, reducing the customer acquisition part of our marketing expenses (the piece that we remove in ACSOI) to nominal levels. We are spending a ton now because we’re acquiring as many subscribers as we can as quickly as we can. We aren’t paying attention to marketing budget (just marketing ROI) in the way a normal company would, because we know that even if we wanted to continue to spend at these levels, we would eventually run out of new subscribers to acquire. So our customer acquisition spend drops severely to reflect the fact that eventually we’ll run out of people we can add to our email list. We view this internally as a very large one-time expense and then our job forever after will be to continually convert these subscribers into customers and to make sure our customers keep buying from us. Ongoing, the normal marketing dollars we spend are not something we would remove from our internal calculation of ACSOI.
Over the past several months we’ve been consistently reducing our marketing spend and yet revenues are still increasing at a significant pace. In Q1 of this year, marketing represented 32.3% of our net revenues. By the end of Q2 it had fallen to 19.4%. And it has continued to fall over the past several months all because we’ve been investing in our own long-term marketing channel—our email list.
Internationally we see the same trends—marketing is down, but revenues are up—every country is either losing less or making more. Even in young markets like Korea, where we’re still making massive investments, we’re seeing unprecedented growth. We started building our Korean team this January, despite the presence of two competitors that were larger than any we’d previously battled from behind. Thanks to the brilliant execution of the Korean team, we are set to be the market leader within months. We’ve never had a country grow as fast as Korea!
2. NEW BUSINESS LINES ARE BOOMING
Travel and Product are enormous opportunities. After only a few months, they’re already making up 20% of revenue in some countries. We sold $2M worth of mattresses in the UK—in one day! Groupon Getaways will do $10M in its first calendar month—which you might think is awesome, but we’re actually disappointed with those results because we know how much better we’ll be doing soon.
While there’s still a ton of work to do, Groupon Now! continues to see weekly double digit growth. The model works and I believe it will play a major part in the future of our global business as more merchants and customers join the marketplace.
3. WE ARE PULLING AWAY FROM COMPETITION
If there’s a question I’ve received from Groupon sceptics more than any other, it’s, “how will you fend off the competition—especially massive companies like Google and Facebook?” I could give a dozen reasons to bet on Groupon, but it’s impossible to predict the future or the actions of others. Well, now the sleeping giants have woken up—and the numbers are showing that what was proven true with literally thousands of other competitors is just as true with the incumbents of the Internet: it’s kind of hard to build a Groupon. And since anyone with an Internet connection can track the performance of our competitors, I can be more specific:
Google Offers is small and not growing. In the three markets where we compete, we are 450% of their size.
• Yelp is small and not growing. In the 15 markets where we compete, our daily deals are 500% of their size.
• Living Social’s U.S. local business is about 1/3rd our size in revenue (and smaller in GP) and has shrunk relative to us in the last several months. This, in part, appears to be driving them toward short-sighted tactics to buy revenue, like buying gift certificates from national retailers at full price and then paying out of their own pocket to give the appearance of a 50% off deal. Our marketing team has tested this tactic enough to know that it’s generally a bad idea, and not a profitable form of customer acquisition.
• Facebook sales are harder to track, but are even less significant at present.
My point is not that our competitors will fail—some may actually develop sustainable businesses, or even grow—after all, local commerce is an enormous market. The real point is that our business is a lot harder to build than people realise and our scale creates competitive advantages that even the largest technology companies are having trouble penetrating. And with the launch of NOW, I suspect our competition will have an even harder time in light of the natural barriers to entry that are needed to build a real-time local deals marketplace.
4. OUR TEAM
This is the fluffiest of the four points, but maybe the most important—we’ve built a global team of hungry entrepreneurial operators and seasoned executives that rivals any team I know of.
I point out the team because while today the business is strong and it appears we must endure success for a while longer (despite its impermanence), we will inevitably be challenged with issues we didn’t predict—and when that happens, the quality of our team will be a deciding factor in our ultimate long-term success.
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