Jonathan Weil joined Bloomberg News as a columnist in 2007, and his columns on finance and accounting won Best in the Business awards from the Society of American Business Editors and Writers in 2009 and 2010.
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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