Friday, June 3, 2011

Ghosts of Bubbles Past

Brilliant, and timely:

To highlight this point, consider the absurd example of a Web-based company whose core service is to sell dollars for $0.85 each. This company could obviously achieve record visitors and page views at its Web Site. Revenue growth would easily set records, and it is quite conceivable that sales could reach into the billions within the first few quarters of operation. Apply even the most conservative Internet price-to-revenue multiple to this franchise and we are talking about a multi-billion dollar market cap.

...from 13 years ago. @bgurley via @cenedella

Thursday, June 2, 2011

Notes on the Groupon S-1

Couple notes:
  • Growth has been preposterously good.
  • Groupon spent $180mm on customer acquisition in Q1 '11 and grew by a net of 33mm subscribers. That's $5.45 per net subscriber.
  • Their margins are 42%, and not the 50% they so often claim. Now that their average take is public, will they still be able to talk people into giving them 50%?
  • Rob Solomon earned 6.8% of the company for about a year's work. What the hell kind of vesting schedule was that? Was he going to earn 25% of the company if he stuck around for a normal 4-year vesting schedule? Or was Groupon generous enough to vest 100% of his shares after only a year? Seems ludicrous.
  • I find it more than a little odd that they ignore their marketing expenses when determining CSOI - one of the three key metrics they watch.
  • More than half their revenue is from their International operations
  • "We also offered several national deals to generate revenue and increase brand awareness, which reduced our gross margin."
  • "We have focused the majority of our marketing spend online, particularly on social networking websites and search engines as part of our new subscriber acquisition strategy."
  • In an effort to find some negative numbers in the Groupon filing, I see the following: Percent of subscribers who have ever purchased is down 25% from Q1'10 to Q1'11; revenue per merchant is down 25%; Groupons sold per merchant are down 18%; average Groupon price is down 9% to $23.
  • In the last quarter, Groupon's net cash from operations was $18mm. The biggest factor there was "a $121.2 million increase in our merchant payables, due to the growth in the number of Groupons sold". Holy cash flow!
  • "For example, in December 2010, we partnered with Redbox to offer a daily deal to their user base and we acquired over 200,000 new customers through that offer and in March 2011, we partnered with eBay to offer a daily deal to their user base and we acquired over 290,000 new customers through that offer." Big deals!
  • 7,000-person headcount includes 3,500 sales people, 410 "city planners", 925 editorial staff, 277 merchant services personnel, 825 customer service reps, 253 in Tech
  • "As of March 31, 2011, we had 1,724 employees in our North America segment, consisting of 811 corporate and operational staff, 661 sales representatives and 252 customer service representatives"
  • Groupon's new COO is making a killing. $500k base, $500k bonus, 1.1mm shares (300k of which vest immediately)

The following bullet is going to deserve its own section:
  • "The Q2 2010 cohort included 3.7 million subscribers that we initially spent $18.0 million in online marketing to acquire in the second quarter of 2010. In that quarter, we generated $29.8 million in revenue and $12.8 million in gross profit from the sale of approximately 1.2 million Groupons to these subscribers. Through March 31, 2011, we generated an aggregate of $145.3 million in revenue and $61.7 million in gross profit from the sale of approximately 6.3 million Groupons to the Q2 2010 cohort. In summary, we spent $18.0 million in online marketing expense to acquire subscribers in the Q2 2010 cohort and generated $61.7 million in gross profit from this group of subscribers over four quarters."
  • From the bullet above, we can extrapolate that it took about four months for Groupon to make their money back on a per-subscriber basis.
  • The average new member cost $4.86 and delivered $3.46 in gross profit during Q2'10, nearly paying off immediately. Over the next three quarters, that same group of people delivered an average gross profit of $4.41 per quarter for a total first year gross profit (ignoring acquisition cost) of $16.68.
  • Groupon members seem to be spending more the longer they're members. (Although the Q2 profit/member metric might look unduly low because of members who joined at the very end of Q2, leaving themselves little time to contribute to those Q2 profit numbers. Wouldn't it be helpful if Groupon shared the profit per member during the member's first 90 days - instead of the arbitrary Q2...?)
In summary, Groupon's S-1 filing is a fascinating document about a fascinating company. Lots to learn from in there...