Groupon’s Strikeouts Reveal an Unspoken Truth
bloomberg.com
bloomberg.com
BABIP doesn't tell you a ton about a player's overall performance, but it does tell you how lucky they've been if you compare it to their historical BABIP. Some guys have awful years because their skills fall off a cliff (Adam Dunn is in that camp right now). But some player just have terribly unlucky seasons in terms of how defense affects the balls they put in play.
If a player's BABIP is way down (or up), but his line drive rate, strikeout percentage, and home run rates are the same, you can make a good guess that his batting average will regress back towards his historical average.
I'm sure if you told the average baseball fan about BABIP, he or she would call it BS. Yet, it's a great metric for determining whether a player's poor/excellent performance is sustainable.
It's amazing to see how good a pitcher can look when his fielders are getting to everything only to have him fall of the table when the law of averages kicks in the next season.
*fixed a typo
http://www.fenwaywest.com/2011-articles/june/sabermetrics-ex...
This part gets off topic but since we're talking SABERMETRICS!!...
I'm not that great of a statistician and truthfully just pay attention to this stuff for fantasy baseball, but I always find that BABip isn't the greatest for hitters, and as great as the data is (for anyone interested fangraphs is a great resource) interpreting this data can be troubling--I mean at the end of the 2008 season people thought Dunn's BABip was an indicator that he'd just fell apart--but he did turn that around for 2 seasons... and I think that was merely a product of him going from the NLwest to the NLeast(do you think the NLeast has that good of collective fielders)--and then to the ALC where he'd square off against more often than not a top tiered defensive team where he's now struggling. I guess my question with BABip how do you interpret luck with decreasing skill level? I've looked at that quite closely trying to look for correlations with age etc, and I can never find anything that shows me that BABip for interpreting upcoming season potential is anything but a crapshoot.
If their churn is very low, the adjusted CSOI numbers are interesting to look at (once acquired, customers stick around for awhile and have a positive lifetime value). If their churn is very high, welcome back to the 2001 bubble. The fundamental question about a business at this scale isn't so much whether they are making or losing money, but whether anyone actually wants what they're selling (at a price higher than what it costs to deliver). It really isn't rocket surgery.
Or their business model is to sell irrational exuberance and cash out before anyone notices. That's also a viable business model.
Don't forget that they hid $36.2 million in stock-based compensation as part of this accounting trick.
"We won't need much marketing, nor will we be offering significant equity compensation in the future. Acquisitions are a "one-time" thing. Therefore, our long term profitability is looking pretty good."
We, as investors, are welcome to accept that reasoning or not. I think it's pretty weak. Others will disagree. But it's pretty plainly stated. (If anything in a financial report can be considered "plain").
Edit: I'd love to hear why I"m wrong about this from someone who down-voted. Am I missing something?
Frankly, if the SEC (who makes the Keystone Kops look serious) is giving them a hard time about this non-standard financial measure, it is not simply that investors "are welcome to accept the reasoning or not"
Granted, I'm speculating as to their pitch as to why this is relevant, but the numbers are exceedingly clear to any investor who reads it, regardless of their spin (or lack of spin).
Do we really want financial statements packed with management's perspective on why the numbers are important? There is a balancing act there as well. The more you demand explanation, the more you invite abuse and salesmanship into what is supposedly a factual report.
Too little explanation and you get a frustratingly difficult to read report. Too much, and you may as well be reading a marketing brochure.
In the grand scheme of financial shenanigans, this one barely registers. At worst, it's a poorly explained, weak argument aimed at painting a pretty picture of the company.
I agree that stripping out marketing costs to acquire customers is harder to understand in this way and would seem to be somewhat out of the ordinary.
[1] for example ARM Holdings plc is listed on LSE and NASDAQ and shows its Q2 earnings press release with "normalised" figures quoting as being based on IFRS, adjusted for acquisition-related charges, share-based payment costs, restructuring charges, profit on disposal and impairment of available-for-sale investments and Linaro™-related charges http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...
Anyway, for example, during its last years, the well known large company i worked at, was steadily posting near neutral quarters on non-GAAP, excluding one time charges, basis. The only thing is that each quarter there would be at least a one "one time charge" that would result in the quarter being deep in red. Not surprisingly at all if one understands that the life and business in particular is just a sequence of one time events :)
(there is of course a very reasonable use of one-time charges - if company generates a profit, then good accountants would dig out some "one time charges" that would allow to decrease/avoid the profit tax)
Also, when companies do these adjustments, they should carry it consistently throughputs its full extent, i.e. by estimating the dilution
For the last few years EA has been including deferred net revenue as the largest item in their non-GAAP numbers. This value reflects the estimated revenue from ongoing online sales of digital goods over the expected lifetime of an online game.
Example: http://investor.ea.com/releasedetail.cfm?ReleaseID=594196 (note the detail they go into as to why they're including the non-GAAP items towards the middle of the release for contrast with Groupon)
Is Groupon going to become a smash hit or implode? Still infinitely excited about this IPO. It's going to be a great story, whichever way it goes.
The attempt of this metric is to explain what their business looks like in another year or so when they've reached some level market saturation. Groupon has treated the deals space as a race (I don't personally agree that it will necessarily pan out this way).
But it's insane not to see that marketing expenses will drop and that they can be comfortably profitable.
Look, projections based on assumptions are part of the investing game. And while I appreciate your enthusiasm, the likelihood that you are correct is not the point.
The point is, there is already an existing method of disclosing assumptions and projections for the future, it's called a pro-forma financial statement. Groupon can simply state their assumptions for when their customer acquisition expenses will go away and give us their projection for what they think their financials will look like at that point in time. In the time-honored format that has served many companies before them.
Giving us a new number for what their business looks like now is ridiculous, because there already is a standard way to share their hopes and dreams of what their company will look like in the future. And that has nothing to do with what you or I might think of their assumptions about what might happen in the future.
What I'm defending Groupon against (not that they need me) is the ridiculous pot shots at their business model as of late and that somehow they're trying to scam people (You'll probably see a few show up in the comments today).
They've grown a phenomenal amount of revenue faster than anyone ever has before and they've apparently spent quite a bit of money to acquire e-mail subscribers. Groupon is a stupendous outlier when it comes to all businesses before it and the biggest question people have is whether or not the business is sustainable. When these significant marketing costs go away, this should be a very solid business.
In days of yore, companies would not go public until they were actually making money, but tail fins fell out of favor, and conservative investing went with it.
All I am saying is that they should use standard financial tools when promoting their business to investors. I am sure that plenty of people, possibly yourself included, will be just as bullish on their prospects.
A thousand times, yes!
Investors need baseline, objective, bottom-line numbers to work with. These numbers help potential investors evaluate where the business is at today, and (perhaps more importantly) help current investors evaluate whether the past projections met with reality.
There are plenty of places that companies are able to spin the numbers to tell their story of fabulous fortunes and world conquest. But there are certain places where you have to let the tried-and-true numbers speak for themselves without someone standing in front waving their arms.
It's like going to vegas. It's easy to say: "Hey, I about broke even. Even if I did lose a little money on the tables, I got some free drinks and I had fun this weekend." Sometimes that story is true, and sometimes they are some pretty-darned expensive free drinks. Your bank account will tell the story, and you wouldn't let a casino owner jump in front to "help you interpret" the numbers.
There are two ways to read these tea leaves.
Dropping them completely and saying "look - we're profitable if you assume our customer acquisition cost is zero" seems pretty dumb. How, exactly, are we to assume their marketing numbers will drop at all? It is a sales-driven organization, no?
I'm not sure I'd call it slimy, as the article implies. But I would call it irrelevant. It's not like they're extracting some subtlety from the numbers that is not already well described by GAAP.
Look back at the Amazon founder statements during the loss years than look at Mason's now..
Groupon as it exists is completely running on vapors and wishful thinking.
2. Even though it is an "investor-beware" system to some extent, typically the SEC doesn't support blatant misrepresentation of the company, which is what these metrics do, even if elsewhere they are reporting more accurate numbers.
3. A company trying to act this shady on their government filings does not instill confidence that they are any less shady elsewhere in their business.
Now imagine every company does this, but each in their own way with their own entirely orthogonal way of presenting their hallucinations. Does this make the mrketplace more efficient? More pragmatically, if any such company fails, does this increase or decrease investor trust in the exchange?
The SEC is ultimately responsible for building and maintaining trust in the process. A succession of IPOs where the proper GAAP numbed have been reduced to fine print and footnotes is contrary to their mandate.
Strongly disagree that the SEC or any government agency can be relied upon for anything related to "trust" in this space. Did Sarbanes-Oxley prevent the financial crisis? The SEC is just about building Maginot Lines. Caveat emptor has and remains the operative guidance for investors.
Private ratings agencies have had a poor track record of late, but they are at least somewhat more reliable in that they aren't completely under the thumb of the US government.
It's a tough call. GAAP isn't going to adequately explain the nuance of every business, so notes are appropriate to explain things better.
But, bankers and accountants take advantage of this and twist the notes beyond sane bounds in an effort to make the earnings look good. Taken too far, this behavior can invalidate the accounting reports, making them totally opaque.
There isn't a right or wrong answer here. This example, I think, is pretty silly - as it's not a difficult thing to glean this info from the standard reports. But there are cases where strange accounting practices are good and helpful because underlying business is itself strange.
Really. Well I was thinking something else.
Only then I think Groupon will become a profitable business. Until then I will sit back and watch how Groupon fails. I don't think Groupon has a runway longer than a year.
Well, we're certainly finding out that the daily deals model is profitable for web developers and assorted startups. Hardly a day goes by without hearing about some new Groupon clone, and the number of web developers who are making money from clients who want to build Groupon clones has to be pretty high. It reminds me of a few years back when all our clients wanted to build their own social network and integrate it with their websites.