Good IR is often a case of creative spin tempered by legal restraints and a company’s very real duty to investors. Many companies, particularly in high tech, stretch the boundaries, whether to deal with the realities of being a money-burning start-up with a presumed future or revenue recognition that is highly out of sync with receipt of money.
Daily deal site Groupon went beyond stretching boundaries and firmly into the realm of pushing limits. The SEC pushed back, however, and the company had to modify its S-1 to change a major metric, thereby admitting that, no, it wasn’t profitable.
Not that you couldn’t see it coming. The signs were already in place that the SEC had a hard time with the company’s adjusted consolidated segment operating income (ACSOI) metric, which excluded the company’s very high customer acquisition costs.
As Groupon positioned it, ACSOI was useful because it let investors see how the company would be doing if it wasn’t for the massive amounts of marketing ‘that we expect to end when this period of rapid expansion in our subscriber base concludes and we determine that the returns on such investment are no longer attractive’. (To show how big the difference can be, in the first quarter of 2011, the difference between a positive ACSOI and actual GAAP losses was a swing of nearly $200 mn.)
But there were a couple of problems. One was that the cumulative number of customers as a percentage of all Groupon subscribers has been declining, from 20.7 per cent in 2009 to 17.9 per cent in 2010. In addition, average revenue per subscriber fell to $18 in the first six months of 2011, against $21 over the same period in 2010.
Groupon needs a big IPO given the $1.14 bn venture funding it has received, and that translates into a need for big sales. However, the metrics suggest that the company sees less return from new customers, and so must keep pushing for subscriber acquisition. In other words, the ‘rapid expansion’ may have to continue for quite some time, so treating the related costs as temporary is questionable.
The other problem was that Groupon had gone overboard on self-promotion. Chairman Eric Lefkofsky caused an uproar when he predicted in June that Groupon would be wildly profitable after he was asked about the heavy losses the company has endured. Groupon had to retract that statement in a previous amended S-1.
Regulators tend to operate the way lawyers do: burn them once and they put something in place to avoid the same thing happening in the future. In this case, Groupon may have inadvertently called for greater scrutiny of the metrics that other high-tech companies use.
[Article by Erik Sherman, Inside Investor Relations]