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Groupon's Use of Non-GAAP Measures Questioned

Groupon may be obscuring its losses and the nature of its cash flows by reporting non-GAAP accounting figures.
Marielle Segarra, CFO.com | US
February 9, 2012

On Wednesday CFO Jason Child fielded Groupon's first earnings call since the company went public in November. The company reported a fourth-quarter net loss of eight cents per share, up from a loss of $1.08 per share the year before. Higher-than-expected overseas tax expenses were partly to blame for the loss.

While those income numbers missed analysts' expectations, the more important issue for some experts is Groupon's use of non-GAAP metrics. The way Groupon reports some of its numbers is  troubling, says Anthony Catanach Jr., associate accounting professor at Villanova University and co-writer of the "Grumpy Old Accountants" blog.

One example: Groupon relies heavily on non-GAAP measures such as consolidated segment operating income and free-cash flow. In its fourth-quarter earnings report, the company also used a pro-forma loss-per-share that excluded what it spent on stock-based compensation. That metric reduced Groupon's loss to 2 cents per share from 8 cents per share. 

Companies that use these measures are often "trying to convince you that their loss isn't as bad as it seems," Catanach says, contrasting Groupon with Facebook, which included stock-based compensation in the earnings it reported in its recent S-1 filing.

Catanach says it is also possible that Groupon is obscuring the quality of its cash flow by providing an aggregate cash-flow statement that lacks many of the details required in 10-Q and 10-K reports filed with the Securities and Exchange Commission. "One of the measures that it keeps touting is its improved free-cash flows and operating cash flows," says Catanach. But it remains unclear, based on the statement, "where that cash is coming from," he says. As a result of this omission, the company could be increasing its operating cash flows by stretching out payment terms with its vendors and thus spiking current liabilities, says Catanach. This is a concern because the nature of these liabilities could be crucial information for investors. If Groupon were increasing operating cash flows by slowing payments to merchants, for instance, it could be setting itself up for a fall.

Some of the cash-flow information can be gleaned from Groupon's balance sheet. In the fourth quarter, the company's liabilities increased significantly year-over-year. Compared with 2010, its accounts payable more than doubled. And a separate category, other current liabilities, nearly tripled in the quarter. But since Groupon lumps together accounts payable with accrued merchants payable on its balance sheet, it remains unclear how much of its liabilities are payments it owes to vendors.

More detail would reveal the quality of Groupon's cash flows by reconciling the net loss reported on its income statement with its operating cash flows, Catanach says. "Are the cash flows coming from the liquidation of receivables? Are they coming from the sale of something? Or are they coming from the fact that [Groupon] didn't pay its bills?" he asks.

Groupon's fourth-quarter report wasn't all bad news. The company recorded fourth-quarter revenue of $506.5 million, more than double the same quarter the year before.

In the earnings call, Child was optimistic about the company's future growth, saying it will "continue to invest aggressively in people and technology." He expects Groupon to become profitable as its tax expenses decrease within the next few years.

Groupon shares fell more than 15% on Wednesday after the earnings call.




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