BREAKINGVIEWS - Groupon IPO another bet on profit-free sales

Fri Jun 3, 2011 11:24am IST

An online coupon sent via email from Groupon is pictured on a laptop screen November 29, 2010 in Los Angeles. REUTERS/Fred Prouser/Files

An online coupon sent via email from Groupon is pictured on a laptop screen November 29, 2010 in Los Angeles.

Credit: Reuters/Fred Prouser/Files

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-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Robert Cyran

NEW YORK (Reuters Breakingviews) - Here comes another bet on profit-free sales. Groupon, which filed for an initial public offering on Thursday, has revenue with a trajectory that looks like a moon shot -- started only in late 2008, the Internet coupon company racked up $645 million in revenue in the first quarter this year, about 15 times what it brought in a year earlier. But profit looks like a submarine voyage so far. The firm's operating loss was $117 million in the same period. It's another test of the new dotcom optimism -- and metrics.

Groupon is currently valued at about $13 billion in gray market trading, and the IPO underwriters haven't unveiled a price range yet. Given the huge pop in business networking firm LinkedIn's recent stock market debut, Groupon could fetch a far higher value.

Any company's eventual worth comes from income, not revenue -- however fast-growing. Groupon's short history of big operating losses is a bit surprising, since the company has claimed to be profitable since mid-2009. "We don't measure ourselves in conventional ways," says Andrew Mason, the co-founder and chief executive, in a letter introducing the IPO prospectus.

Tracking gross profit rather than fully-costed operating profit is one thing. And free cash flow, another touted metric, is a valid one. But Groupon's third benchmark is probably unique. Adjusted consolidated segment operating income, or Adjusted CSOI, hopefully won't catch on: leaving out the cost of acquiring subscribers, equity compensation, interest costs, and taxes seems more obfuscatory than useful.

All that said, Groupon's subscribers, of which it claims 83 million, could be a goldmine. The company says it spent $18 million to acquire 3.7 million subscribers in the second quarter last year. They have subsequently generated $62 million in gross profit. If old customers stick around, and new ones exhibit the same behavior, profit margins should soon become positive and large. One significant risk, though, is that competition is heating up.

LinkedIn's first-day 109 percent gain has faded, but the stock still trades 75 percent above where the underwriters priced it. It's hard to see Groupon not attracting strong interest, too. But investors' belief in Adjusted CSOI over actual profit could prove fleeting. As Mason puts it in the prospectus: "Life is too short to be a boring company."

CONTEXT NEWS

-- Groupon on June 2 filed to sell up to $750 million worth of stock in an initial public offering. The firm did not disclose the number of shares that would be sold or their indicative price range. The Internet coupon business says it has 83 million subscribers. Groupon was started in November 2008.

-- The company had sales of $713 million in 2010 and had an operating loss of $420 million. In the first quarter of 2011, revenue was $645 million, and the operating loss was $117 million.

-- The underwriters are Morgan Stanley, Goldman Sachs and Credit Suisse.

(Editing by Richard Beales and Martin Langfield)

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