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Jason Child says Groupon provides these numbers to supplement GAAP metrics and help its investors better evaluate the company.
Marielle Segarra, CFO.com | US
February 10, 2012
Dismissing as "silly" a suggestion that Groupon might be boosting its cash-flow numbers by not paying its bills, Jason Child, CFO of the online coupon company, defended his company's use of several non-GAAP measures in its quarterly earnings report in an interview with CFO on Friday.
Groupon, which released its first earnings report on Wednesday, saw a fourth-quarter net loss of eight cents per share, up from a loss of $1.08 per share the year before. The company also reported fourth-quarter revenue of $506.5 million, more than double the same quarter in 2010.
On Thursday CFO reported that some were questioning Groupon's use of non-GAAP measures in its earnings report. The article reported comments made about Groupon by Anthony Catanach Jr., associate accounting professor at Villanova University and co-writer of the "Grumpy Old Accountants" blog.
In response, Child says Groupon has been transparent about why it uses non-GAAP metrics. Groupon provides these numbers to supplement GAAP metrics and help its investors better evaluate the company, he says. Sometimes GAAP metrics don't tell the entire story, he adds.
"The challenge is, there are a multitude of people we're trying to provide transparency to," says Child. One example is Groupon's previous use of adjusted consolidated segment operating income (CSOI). Ultimately, the Securities and Exchange Commission asked Groupon to remove this metric from its S-1 filing because the SEC did not agree with some of the factors the metric adjusted out.
But Child says Groupon began to use this metric because it "had a number of investors that were continually asking, 'What does your business look like when you get out of this period of significant investment in subscriber acquisition costs?'"
Providing that kind of information to investors who want it can "actually increase transparency" as long as the company advises investors to evaluate these metrics as a supplement to GAAP measures, not a replacement for them, he says. Groupon continues to provide these disclaimers, he says.
More specifically, Child defends Groupon's decision to highlight pro forma loss-per-share, which adjusts out stock-based compensation, in its earnings statement. The company used this metric to allow investors to compare its performance to predictions from analysts who used the same non-GAAP measure, he says.
"Because the analysts are using that to measure us, if we don't provide what that number is, it becomes very confusing for anyone to understand how we compared to the analysts' expectations," he says.
Child also says free-cash flow is a legitimate and useful metric, even though it's non-GAAP. "Free-cash flow is a very well known, understood, and utilized metric by the vast majority of technology, Internet companies, and many others," he says. And the company included CSOI in its earnings report because that's one of the metrics CEO Andrew Mason uses to manage the business, says Child.
He also says Groupon was not obscuring its true cash flow by providing an aggregate cash-flow statement in its earnings report, another of Catanach's criticisms. Groupon did not think the full cash-flow statement gave investors "any additional information" they needed to evaluate the company at this time, he says. And since Groupon will file its 10-K statement at the end of February, investors will soon see the rest of the cash-flow statement, he adds.
When it comes to its cash flow, Groupon has a business model that allows it to generate significant cash by paying its vendors about 60 days after it collects from customers. "We do not have inventory, so those payable days provides an operating cycle that produces cash rather than utilizes it," says Child.
But the company did not increase its cash flow by stretching out payment terms, Child says. Rather, the increase in cash this year came largely from sales growth, he says. "[Catanach] was saying we could be growing our number by not paying our bills. That notion is actually silly," Child says, because Groupon's accounts-payable days last quarter were 68, down from 83 in the same quarter the year before. The number is comparable to accounts-payable days at another online commerce company, Amazon.com.
Child adds that though Groupon's accounts and merchants payables more than doubled year-over-year, revenues increased by a higher percentage. The comparison shows that the percentage of free cash the company produced from payables was lower this quarter than it was during previous periods, he says.
One of the reasons Groupon's other liabilities have also increased is that the company owes local management in some countries payments when they hit profitability or revenue targets, he adds.
Groupon has been the subject of significant scrutiny over the past year. Child says that's probably because it takes time for people to understand and trust new business models. "When you have a high-growth company that is disruptive and that is effectively creating a new industry, you're going to get a lot of people that don't understand it and are going to be skeptical until they see it proven," he says. "It is pretty unusual to have a business that loses money from a GAAP income perspective but actually generates free-cash flow. There are going to be a lot of questions."