What was expected to be one of the hottest stock offerings of the year fell into deeper turmoil Friday, as daily deals pioneer Groupon Inc. said it was cutting its reported revenue in half, and its No. 2 executive left the company.
Regulators have been scrutinizing Groupon's accounting since it filed for an initial public offering that could value the Chicago company at $20 billion.
On Friday, Groupon said it would change what it books as revenue after discussions with the Securities and Exchange Commission. It will now only count as revenue its commission on sales, rather than the total value of an online coupon. Previously, when it sold a restaurant gift certificate for $10, for instance, it would book the full amount, even though a portion went to the business owner.
That change reduces Groupon's stated revenue for 2010 to $312.9 million, down from the $713.4 million previously reported.
The company argued in its amended filing document that it had always told investors to measure its value based on the cash it collected minus merchant payments.
Also Friday, Groupon said its chief operating officer, Margo Georgiadis, is returning to Google Inc. as a senior executive, just five months after she was hired away.
Groupon founder and Chief Executive Andrew Mason said Friday in a blog post that Groupon has hired many senior executives this year, but not all have worked out. He didn't elaborate.
A call to Ms. Georgiadis wasn't immediately returned. In a statement on the company's blog, Ms. Georgiadis said that Groupon "is on a terrific path," and said she has "complete confidence in the team's ability to realize its mission." Prior to joining Groupon, Ms. Georgiadis served as Google's vice president of global sales operations.
One person familiar with the situation said Ms. Georgiadis didn't fit in at Groupon. Mr. Mason would often go around her to other executives, a move that frustrated Ms. Georgiadis, added the person.
Ms. Georgiadis's departure comes amid an IPO that has brought intense speculation from investors over the viability of Groupon's business model.
The company canceled a road show it had scheduled for early September and pulled back on plans to go public. It is still evaluating its options on a week-by-week basis.
This is the second operating chief to leave Groupon this year. Rob Solomon, a Silicon Valley veteran who joined Groupon in early 2010, said he left the company because it got too big.
The company hasn't hired a recruiting firm to look for a replacement for Ms. Georgiadis, said a person familiar with the matter. That decision could change upon further consultation with the board, added the person.
Instead, Mr. Mason said Ms. Georgiadis's departure is an opportunity to "reorganize in a way that reflects our evolving strategic priorities." He said sales, channels, international and marketing will now report to him.
COMMENTARY: I have been covering Groupon's IPO since my blog post back on December 29, 2010, when rumors began circulating that Groupon's CEO Andrew Mason was planning an IPO. Those rumors prooved to be incorrect.
In my blog post dated June 2, 2011, I commented briefly on Groupon's S-1 Registration Statement filing for their IPO, especially the $750 million that Groupon aimed to raise through the IPO at a valuation of $20 billion.
I didn't have time to analyze the S-1 Registration Statement thoroughly on June 2, 2011, but after reviewing it carefully, in a blog post dated June 3, 2011, I discovered several things about Groupon since it started operations:
- Groupon had never made a dime in profit ($413 million in accumulated loses through 12/31/10).
- Groupon had an accumulated a working capital deficit of $209 million through 12/31/10, and the deficit was probably well over $300 million by March 31, 2011.
- Groupon was using its creditors cash advances to finance its operations.
- Groupon had aggressively expanded its worldwide sales force during the time leading up to its IPO filing date.
- Groupon had raised nearly $1.1 billion in total venture capital, but nearly $950 million or 86% of that amount had been used to cashout earlier investors, CEO Andrew Mason and three other officers, and two retiring board members.
Accompanying the IPO filing was an unusual letter from CEO Andrew Mason, in which he said.
"Groupon is focused on growth, and measures its success by metrics such as free cash flow, gross profit (Groupon’s actual take from its customer transactions, which was $280 million in 2010) and a third yardstick that is quite a mouthful: Adjusted Consolidated Segment Operating Income. Those kinds of non-standard financial metrics were all the rage in the late 1990s tech bubble."
What caught my attention was Mason's third yardstick for measuring Groupon's growth:"Adjusted Consolidated Segment Operating Income". I thought Groupon's metric was so unusual, that I contacted the SEC and brought it to their attention. This non-traditional financial metric stirred a lot of controversy among the financial community, and on July 28, 2011 became the basis for an SEC investigation. The SEC frowns on unconventional accounting metrics that are not generally-accepted among accountants, and which could be double-talk aimed strictly to confuse investors. On August 11, 2011, it was announced that Groupon had amended its S-1 filing to exclude that controversial non-traditional accounting term. Now Groupon has been forced to restate its revenues and refile another amended S-1 registration statement.
In a blog post dated August 9, 2011, I commented on Rocky Agrawal's June 13, 2011 article appearing in TechCrunch, in which he criticized Groupon's use of float to finance its business (the working capital deficit I mentioned above), pointed out that Groupon's web traffic was not necessarily profitable traffic, and called Groupon's business model "unsustainable". I agreed with all Rocky's criticisms and added some comments and criticisms of my own, including Groupon's partnership with Tencent, Yungfeng and Rocket Asia to form GaoPeng, the poor and costly performance of Groupon's worldwide salesforce, working capital deficit and the failure of GaoPeng's salesforce to make a dent in the Chinese market.
Nothing up until this point surprises me about Groupon. Groupon's latest amended S-1 filing to readjust its revenues, shows just how poorly managed this company is. Any preconceived notion that Groupon should be valued at $20 billion is pure investor exhuberance and insanity run amuck. The cancellation of its roadshow is a final realization by Groupon's CEO Andrew Mason that he was in trouble. That came on the heels of the revenue readjustment.
The departure of two Groupon COO's, first Rob Solomon, and now Margo Georgiadis in quick succession points out another huge problem--a lack of leadership, communication and organization. This should give IPO investors reasons for concern about whether the company is even properly managed.
You also have to question the ethical conduct of CEO Andrew Mason and the other key members of his management team, who lustfully cashed out prior to the IPO filing. They could not wait until after the IPO filing, leaving current investors holding the bag.
On June 3, 2011, right after Groupon filed its IPO, The Wall Street Journal provided three big reasons why investors should be worried about the Groupon IPO. How prophetic that was.
In early September, CNBC research analyst John Ford discussed Groupon's delayed initial public offering. After postponing presentations to potential investors early September, Groupon is now aiming to go public in late October or early November, according to people briefed on the matter.
Just how many of these surprises can prospective Groupon IPO investors take. If you ask me, the Groupon IPO is now so over-cooked that it has lost most of its flavor. Instead, it is leaving a rather bad taste in my mouth. What do you think?
Courtesy of an article dated September 24, 2011 appearing in The Wall Street Journal
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