Accounting documents from Groupon Inc. is being scrutinized by regulators according to a source with The Wall Street Journal. The SEC is asking Groupon to answer questions about the measure they are using to explain their financials. Apparently Groupon is excluding marketing and other expenses from their documentation. Groupon is expected to have an IPO this fall.
The SEC has become very cautious about technology companies since the dot-com bubble and bust in the early 2000s. Groupon’s IPO is expected to value the company at $20 billion.
Groupon’s regulatory filings highlights the “adjusted consolidated segment operating income,” also known as adjusted CSOI. The adjusted CSOI of a company draws attention away from marketing costs. And Groupon is spending a boatload of money on marketing costs.
Strubel Investment Management portfolio manager Ben Strubel said that he has “never encountered” a nonstandard financial measurement that Groupon is using. “In essence Groupon is asking investors to look at their profit before any expenses,” stated Strubel. Strubel is not planning on shorting the stock and is not planning to invest in the Groupon IPO. “It’s not a surprise they want investors to focus on measures that don’t include expenses since their expenses have been rising.”
The adjusted CSOI is one example of a nonstandard growth metric that an Internet company is using. When Zynga filed for an IPO in July, they used a metric called “bookings.” Bookings is when revenue is reported based on Zynga’s advertising and virtual goods. Facebook often uses a metric called monthly active users (MAU). Pandora Media included total listener hours and total registered users as a key indicator of business growth when filing for their IPO.
While Groupon is growing at a rapid pace since they launched 2.5 years ago, the company has been spending a lot on marketing to acquire new customers. The company has been acquiring many Groupon business model clones that operate overseas too. Groupon believes that the adjusted CSOI figure would give investors a look at the company’s performance by excluding “expenses that are noncash or otherwise not indicative of future operating expenses.”
Groupon reported $81.6 million in adjusted CSOI during the first quarter of 2011. If marketing costs were taken into consideration, that figure would actually be a loss of $98 million. For those who are concerned about the adjusted CSOI figure, Groupon filed an amendment to clarify that the metric “should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or as a valuation metric.”