“The Groupon IPO filing is out, and, as expected, it’s hugely entertaining. The risks section alone is more than 13,000 words, or around the length of a decent-sized novella” says Paul Kedrosky, blogging with Bloomberg this week. He even encloses a word cloud of the risks section.
The filing is worth a read. It begins with a caveat : “If we fail to retain our existing subscribers or acquire new subscribers, our revenue and business will be harmed.”
You can see the problem. Groupon lost $389.6 million in 2010 on revenues of $713.4 million. In the first quarter of 2011, revenues had soared to $645 million but the losses were over $100 million. The marketing spend in the first three months was $400m that’s around 60% of revenues. With a gross margin of 40%, it creates something of a problem for the bottom line. The accumulated deficit was $522.1 million as of March 31, 2011.
Revenues have increased from $30 million in 2009 to $713 million in 2010 and in 2011 could hit $2.5 billion (pro rata basis). Subscribers have increased from 50 million in 2010 to 80.1 million in the first quarter of 2011.
The company turned down a $6bn approach from Google in December. There was speculation earlier this year that Groupon could raise as much as $1bn in an IPO, which could value the daily deals site at between $15bn and $20bn.
The value is in the database of 100 million plus subscribers which should be achieved this year. The issue is the sustainability of the model once the cost of acquisition or transaction is trimmed. The average subscriber revenue in 2010 was $14.10 and in the first quarter of 2011 was $7.75. The acquisition and marketing cost per subscriber was $8.64 in 2010 and $4.83 in the first three months of 2011.
The chart illustrates the revenues per subscriber in Chicago, Boston and London. The trend is to just over $12 over time. It is a huge churn of a low average subscriber value and an average transaction value of $22.00.
As a chief exec of a large organisation, the one message from the front line we used to dread was “Things going well send more money.” The dot.com boom has been and gone but the “burn rate” is back.
The risks are weighty and fully explained in the 13,000 word risk section.
"We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to invest to increase our subscriber base, increase the number and variety of deals we offer each day, expand our marketing channels, expand our operations, hire additional employees and develop our technology platform."
"These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. Many of our efforts to generate revenue from our business are new and unproven, and any failure to increase our revenue could prevent us from attaining or increasing profitability."
"We cannot be certain that we will be able to attain or increase profitability on a quarterly or annual basis. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and results of operations may suffer.................." You have been warned.
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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.
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