Ac416

CASE: GROUPON

• operates in two segments: north america and international

• Uses Adjusted CSOI (Consolidated segment operating income) and Free Cash Flow as a key non-GAAP financial measures

• CSOI is adjusted for marketing expenses, acquisition related costs and stock based compensation expense. It is considered as an important measure for business performance because it excludes expenses that are non cash and hence not indicative of future operating expenses.

• However, it must be used as a complement to the entire consolidated statements of operations.

• It is also limited in the sense that it does not reflect cash investments, interest expense, foreign exchange gains and losses, etc. Also, limited because other companies may calculate it differently, hence, reducing the usefulness of it as a comparative measure.

• because of these limitations, it does not represent the discretionary cash available to the groupon for investing in the growth of the business. therefore, it should not be used in isolation but with other financial performance measures and GAAP results.

• FCF on the other hand is derived by excluding ‘Purchases of property and equipment’ from ‘CF from operations’.

• it presents a conservative view as such purchases on fixed assets are a necessary component of ongoing operations.

• however, it does not represent the actual residual CF from operations because for instance, it does not include cash payments for business acquisitions. thus, it must be complemented with entire consolidated statements of CFs.

• Groupon sells coupons for a merchants products -takes half the proceeds( presenting a big discount in merchants usual price) and in return aggregates demand from millions of potential customers who receive its emails. However, how long will merchants pay for this even though they could it themselves? third party agents- earn revenues from commissions.

• good revenues in the start, followed my fall of 7% sequentially. business model coming to a rebound after all.

• the company points out that their FCF has hit heights. however, in the first and second quarter, cash profits fell a lot.

• One strength associated with groupon is that it gets paid immediately earn coupons are sold but pays merchants slowly - which makes delayed payables the source of cash.

• However, given the add in capital expenditures and others, merchant payables fell and hence, cash generation of groupon may soon be nothing to crow about.

Wall street Journal

• Will investors get a full explanation as company announces its second quarter earnings?

• Surprisingly, groupon in the first quarter did well in its north american business, with net revenues rising 33% from last quarter. According to the chief executive, it was due to the technology that targeted customers with coupons that they are more likely to buy. Thus, giving investors some comfort and confidence in the business.

• however, this doesn't explain the whole story. As investors want to dig in, they may find that the earnings may be inflated due to groupon’s start up of new business called groupon goods in addition to the existing core deals. Given how the accounting treatment of this business inflates overall earnings and also the fact that the deals from the new business were first party deals,  this makes its earnings questionable for investors.

• Given that the new business was making high revenue growth, it could be masking the existing core daily deals business.

• In addition, giving Europe’s slowdown, groupons international business me have slowed even more.

•  Also, groups investors are Facing a price slump since going public, and such contradictions are making it difficult for investors to understand its business.

Bloomberg

• According to Bloomberg, if investors get important information to be disclosed before the shares are sold, they can protect themselves from falling share prices. Some information about groupon could have come handy for investors to Question the company's growth prospects- bringing in clarity and transparency. Groupons stock had lost 74% of its value since it went public.