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The Brode Report  |  August 2011

David Brode profile   Well, here we are, the end of August. My kids are back in school (10th grade and two in 8th grade, can you believe?) even though the mercury is pushing past 90 most days. I see the daylight getting shorter--we're now two months past the solstice. Pretty soon it'll be time to look for ski gear for the upcoming season.

This month I return to Groupon again. With more data out, I just couldn't resist.
 
 
 
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Grouponís IPO Story is Falling Apart

Groupon filed an amended S-1 prospectus for their IPO, and now thereís more grist for the mill. Iím still bearish and feel justified by the new data that came out. Letís review the objections I had in the June newsletter and the new information.

1. Prior statement: Groupon isnít profitable. They use an odd measure to make themselves look profitable.

   New Information: First of all, Groupon dropped their controversial measure of ACSOI (ďAdjusted Consolidated Segment Operating IncomeĒ). I had mistakenly called it CSOI in June, but the key was that it excluded marketing costs. Turns out the SEC objected as well: see the NYT story. Now they include marketing costs. And now they show themselves as unprofitable.

2. Prior statement: Margins are at risk.

   New Information: Gross margin in Q2 dropped 3% from Q1 2011. Further, their CSOI, which had been 12% in 2010 is (7%) in Q2 2011. And all this has happened while Groupon continues to stick with the 50-50 split. If that changes, their economics will be hurting even faster.

3. Prior statement: Revenue growth and customer analysis seem unlikely to justify the valuation.

   New Information: First revenue did grow, and significantly. The NYT article noted $878M in revenue and called it a 36% increase over Q1, but itís only an 18% increase over what was reported previously for the first quarter in the initial S-1. Either way, itís not enough: my DCF showed they needed to have 200% revenue growth over the year, which is 32% per quarter this year, compounded. Already theyíre falling behind.

And it gets worse. Two key metrics for Groupon are Revenue/Subscriber and Revenue/Customer. I had noted previously that for Groupon to justify a $30B valuation, they would need three billion subscribers in 2022 if their metrics held. But the metrics are already deteriorating, and fast: revenue/subscriber fell by 30% from Q1 to Q2. And while deals/customer increased slightly, Revenue/Customer fell by 15% in the quarter.

Everywhere you look, Grouponís story seems to be falling apart. I remain a skeptic.

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