Groupon’s Strikeouts Reveal an Unspoken Truth: Jonathan Weil
About five miles south of Groupon Inc.’s headquarters, at U.S. Cellular Field, there’s a veteran baseball player for the Chicago White Sox named Adam Dunn who is having a remarkable season. All he needs is a little help putting his numbers in the best possible light.
Dunn, the team’s designated hitter, has a B.S. batting average of .292, in a sport where players dream of hitting .300. Never heard of a B.S. batting average before? The B.S. stands for “before strikeouts.” Add them back and Dunn’s true batting average was .165 as of Aug. 2, the lowest in Major League Baseball among players with at least 295 at-bats.
If you like that example of stupid math tricks, then you’ll love the bizarre profitability metric Groupon has invented called “adjusted consolidated segment operating income.” This nonstandard measurement excludes most of the online coupon distributor’s operating expenses, making the hugely unprofitable startup seem comfortably in the black. Think of this as its own version of a B.S. batting average, only with a different name.
You would be hard-pressed to find any clear explanation in Groupon’s latest registration statement of why adjusted CSOI provides useful information to investors, even though the Securities and Exchange Commission’s rules say the company is required to offer one. Not surprisingly, the SEC is taking a hard look at Groupon’s disclosures ahead of the company’s hotly anticipated initial public offering, according to multiple news reports last week.
A Groupon spokesman, Brad Williams, declined to comment, saying he couldn’t speak while the company’s registration statement is pending.
By the Numbers
Here are Groupon’s official numbers. The company said it had a net loss for 2010 of $413.4 million on $713.4 million of revenue, under generally accepted accounting principles. On an adjusted CSOI basis, meanwhile, it showed income of $60.6 million. The company’s chief executive officer, Andrew Mason, in a letter to investors that Groupon included in its July 14 amended prospectus, said this metric “provides us with critical visibility into our business,” though he didn’t say how.
To come up with that figure, Groupon started with a line on its GAAP income statement called loss from operations, which was $420.3 million. Groupon then excluded three categories of expenses: $241.5 million of online-marketing costs, also known as customer-acquisition expenses; $36.2 million of stock-based compensation, a non-cash item; and $203.2 million of non-cash “acquisition-related” costs from its purchase last year of a similar company in Europe.
Moment of Truth
Likewise, for the first quarter of 2011, Groupon said adjusted CSOI was $81.6 million; it said its loss from operations was $117.1 million and that its net loss was $113.9 million.
Now for the moment of truth. In addition to requiring a full reconciliation to GAAP, the SEC’s disclosure rules for nonstandard financial metrics require companies to provide “a statement disclosing the reasons why the registrant’s management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant’s financial condition and results of operations.”
Groupon’s explanation: “We consider adjusted CSOI to be an important measure for management to evaluate the performance of our business as it excludes certain non-cash expenses and discretionary online marketing expenses that are incurred primarily to acquire new subscribers.”
As far as I can tell, there’s nothing there or anywhere else in Groupon’s registration statement that tells you why this cockamamie arithmetic is useful to investors. All the company did was spit back the definition of adjusted CSOI and what it excludes. The reasoning is entirely circular.
Lack of Clarity
That lack of clarity is revealing, and not just because Groupon is making a mockery of the SEC’s rules. Nobody should consider this number to be of any use, because even Groupon couldn’t come up with an explanation for why it has merit.
You would have to be nuts to exclude marketing costs, for example, when evaluating a company’s operational performance. The only thing helpful about this metric for investors is that it might help the company’s current owners someday flip their shares to the masses. Adjusted CSOI is a public relations gimmick, not a legitimate financial-reporting tool. If Groupon’s bosses want to keep citing it, they should describe it that way.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
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