Are you serious? Groupon misled investors for years about its real financial numbers, and Mason (along with the puppetmaster, Lefkofsky) made millions off the fake data. The humor in this letter hides the real damage done to investors.
Fake data? Give me a break. Groupon pioneered a new business model. With a new business model you need to account for things in ways they have never been accounted for before. While I'm not arguing their numbers didn't look shady at times, but it's because no one knew how to account for how the cash moved through Groupon's books because no one had ever done it before.
Do you count the full price of the deal as revenue? Or do you count only Groupon's cut of the deal as revenue? How often should they pay out the merchants? How do you account for refunds? Where do you keep the reserve pools Groupon needed to pay out all those refunds? Are the reserve pools considered an asset? Or a liability? How long do you need to hold the reserves before you can be sure there won't be any more refunds?
Management had to answer all of these questions in a matter of weeks because Groupon was growing so fast. It's not surprising they kept changing the way they accounted for things so often. The fact that you think Groupon knowingly misled investors like it's some sort of conspiracy is absurd.
The problem with this argument has always been that the answers are clear to people with some business experience.
"Do you count the full price of the deal as revenue?"
Gross revenue? Sure. Net revenue? Of course not.
"Or do you count only Groupon's cut of the deal as revenue?"
Yes, as net revenue. Of course. Same as any marketing/advertising company.
"How often should they pay out the merchants?"
As slowly as possible, from Groupon's perspective. What was so amazing here was they essentially built an ad network where the inventory suppliers had zero power over the scenario and accepted unfavorable payment terms. Instead of getting paid net 30, they accepted net 90 or worse.
"How do you account for refunds?"
As credits to the expense account where the original purchase was posted, just like with any other business.
"Where do you keep the reserve pools GRoupon needed to pay out all those refunds?"
You don't have to keep it anywhere because they get marked as credits to the expense account. There's no need for a pool or any other sort of artifice. Creating a pool makes sense only to cloud what's going on.
"Are the reserve pools considered an asset?"
Of course not. But why do we have a pool again?
"Or a liability?"
Of course.
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Groupon did a lot of brilliant things. One of the smartest was realizing that though their model was no different from any other sort of ad network, since it wasn't immediately obvious to outsiders, and since their suppliers had so little power, they could make up new accounting rules and principles to generate favorable cash flows.
I don't write this to say this was wrong. It was brilliant. I want to disagree with the idea that they HAD to do this. They could have paid out net 30 and counted refunds like any other business, but they realized they could get away with not doing this for some time, and ran with it.
One of their obvious no-nos was that they were booking the total amount of the deal as recognized revenue, instead of their fees. Also they came up with non-GAAP accepted metrics to measure their performance which were deemed dubious by outsiders.
Rocky Agarwal is far from credible. He made a name for himself by making it his personal goal to bash Groupon as much as possible. Probably because a number of his co-workers at TellMe left to join Groupon and he supposedly wasn't offered a job to join Groupon.
His so called reporting wreaks of jealousy as he watched his former co-worker's equity skyrocket with Groupon's growth while he was left out.
I'm fascinated by the theory that somebody's reporting on a topic is automatically suspect because they have developed a strong opinion on the topic.
If you've got issues with what he wrote, I'd be interested to see what specifically you feel he got wrong. But regardless, I think he deserves credit for digging into Groupon financials, and for calling out the lack of substance well before most people did. Jealous or not, the collapse of the daily deals space and Groupon's sickly stock price suggest that he was broadly correct at a time when most financial journalists were hyping Groupon and its stock.
It's true. Groupon's accounting gimmickry is extensive, and began pre-IPO (recognizing full purchase price of coupon when they are only acting as an "agent" (middleman) not as a "principal" (i.e., making the food, owning the spas for the massages etc.), which as a CFO I can tell you is Accounting 101.
And yes Rocky Agrawal and the Grumpy Accountants Professors and PrivCo.
And the accounting tricks continue - even most Wall Street analysts covering the company for a living have not picked up on it - but for "Groupon Goods last fall they changed the way they account for those purchases. (Remember for Goods their "deal-share" is even smaller than their 37% or so for restaurants/spas/etc. It's under 10% for tablets, laptops etc. So when they at first sold a $2000 flat screen TV, they booked (as forced by the SEC finally) just their $200 cut. When revenue growth slowed, they (meaning likely Eric Lefkofsky instructed) Groupon to find a way to recognize the entire $2,000 sales as their revenue. And the only way (again, speaking as a CFO who knows this intimately - not boasting my opinion is better than anyone else's, just sharing the real facts, I don't own or short the stock - and the only way they could recognize the entire $2,000 example TV sold is if they "took possession of it, then re-sold it" in plain language. And one of the requirements is that Groupon has (even briefly) the "risk of loss" (that is, the TV breaks while legally/technically in their possession before shipped to the buyer). I.e., find a way that Groupon's technically not just a deal middleman on Goods and let the buyer and seller deal with each other, but be the Reseller like Amazon.
So they literally (and this is not speculation, this is in the SEC filings - not highlighted and sort of minimally mentioned, but it's there) - they literally state starting with their third quarter 2012 10Q that beginning that quarter Groupon signed a new contract retaining a 3rd party company to act on its behalf to receive the goods from the Goods merchant, then that company acting on Groupon's behalf - with a contract that says Groupon bears "all risk of loss" and then ships it to the buyer. Now that sounds awfully inefficient, and it is, because it has to be shipped twice, reducing Groupon's margins to near zero on Groupon Goods. But it takes Groupon Goods revenue from 10% of each sale to 100$ of each sale. Starting to get the picture?
So in the last 2 quarters they reported a dramatic spike in Groupon Goods revenues (no profits of course) but analysts - not knowing any better - began to upgrade the stock, saying yes the daily deals business is slowing to almost 0$ year over year, but look at Groupon Goods! Its revenue is suddenly growing like gangbusters! (I have to give hat tip here to an Accounting Seminar that used it as an example, and to PrivCo who published a Research Note detailing it, but I checked everything in the SEC filings and can say with 100$ certainty, but of course you can confirm it yourself.)
So price targets were raised, and many former bullish turned bearish analysis (like Ken Sena from Evercore) turned bullish again, and said Groupon is going to surprise all the naysayers! Groupon Goods is its true future, it's growing in triple digits in revenue now! (Because their revenue recognized went from 10$ of each sale to 100%, by having this fulfillment company acting on their behalf briefly taking possession of the goods and contract says Groupon has "all risk of loss" - even though the possession was sometimes for 10 minutes, since they just put it in a box and shipped it right away to the waiting buyer who had already pre-ordered it. No inventory, just in and right out the door.
One more fact you should know (again gotta give hat tip to PrivCo securities lawyers on their staff who pointed this out), go to the section on "Related Party Transactions" (i.e. this is where a company is doing business or hiring a company owned by a senior Officer, Director or Major Shareholder). And in that section - brief as it is - it says one of those Related Party Transactions is that they retain and have a contract with a fulfillment company founded in mid-2012 that is owned by Eric Lefkofsky and Brad Keywell (Groupon's co-founders, Board members and largest shareholders). Yes you read that right. They saw daily deals declining sharply, and decided they had to find a way to "grow Revenue" - without actually selling any more stuff. So they quickly formed this company that signed exactly the contract terms needed verbatim that would allow the accountants to deem Groupon as having taken possession and acting as a principal / reseller and not an agent and recognize the entire Goods amount purchased.
And most Wall Street analysts (Evercore's Ken Sena was on TODAY on BloombergTV still touting the Groupon Goods revenue growth as reason to buy the stock, even though daily deals fell for the first time ever year over year.) He's clueless, and he's telling his clients Buy based on Groupon Goods revenue growth spurt since last summer.
I'll let the HN crew react to above instead of just saying out loud what I think of that or what you should. Share what you think of that.
> It's true. Groupon's accounting gimmickry is extensive, and began pre-IPO (recognizing full purchase price of coupon when they are only acting as an "agent" (middleman) not as a "principal" (i.e., making the food, owning the spas for the massages etc.), which as a CFO I can tell you is Accounting 101.
How this is supposed to be an accounting issue and not fraud is beyond me.
Many (if not all) public companies have two sets of books. One they use to show investors and shareholders, and another used to make managerial accounting decisions.
Sure their investor/shareholder books may seem deceptive, but it's legal and everything is there for us to see and analyze. I have done this type of analysis in MBA level accounting case studies. It's really fun when you see the whole class conclude one thing, but then later find out everyone's wrong due to misinterpreting a few assumptions.
