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Summary:

Just months after raising $950 million, Groupon has filed for an IPO as it looks to stay ahead of a gaggle of competitors in the daily deal market. The company faces challenges in its high user acquisition cost and expansion into local and mobile.

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Just months after raising $950 million, Groupon has filed for an IPO as it looks to stay ahead of a gaggle of competitors in the daily deal market. The company is looking to raise $750 million, which could easily create a valuation much higher than the $6 billion it spurned from Google last year.

The Chicago company peeled back the financial curtain in its S-1 filing and revealed that it is seeing phenomenal growth. It booked $644.7 million in revenue in the first quarter of this year after generating $713.4 million last year and $30.47 million in 2009. It sold 28 million deals in the first quarter, almost equal to the 30.2 million sold last year.

Groupon currently has 83.1 million subscribers as of March 31, up from 152,203 in June 2009 but only 15.8 million users have actually bought at least one deal. It boasts 56,781 merchants as of the first quarter. Groupon employs some 7,107 employees with about half of them in sales.

While the growth numbers are impressive, the company is still not profitable. And it faces a number of risks in keeping consumers and merchants on board with growing competition from the likes of Living Social as well as Internet giants like Facebook, Google and Amazon, which have all launched local deal offerings recently. Groupon has run net losses since its founding in 2008 and expects operating expenses to increase significantly for the foreseeable future. Groupon has yet to turn a net profit and reported a net loss of $389.6 million last year and a loss of $102.7 million in the first quarter of 2011. It had an accumulated deficit of $522.1 million as of March 31.

Groupon CEO Andrew Mason said in a letter that the company focuses on gross profit, free cash flow and Adjusted Consolidated Segment Operating Income, or Adjusted CSOI. In the first quarter of 2011, Groupon generated $270.0 million in gross profit just under what it did all of last year. Adjusted CSOI came in at $81.6 million in the first quarter of this year while free cash flow was $7 million in the first quarter compared to $72.2 million for last year.

The company is focused on acquiring new customers, which is critical to maintaining its growth. That’s also why it will take some time for Groupon to turn a profit. The company spent $179.9 million in first quarter of the year in online user acquisition efforts. Overall, Groupon spent $263.2 million on marketing in 2010 and $208.2 million in the first quarter this year.

“We spend a lot of money acquiring new subscribers because we can measure the return and believe in the long-term value of the marketplace we’re creating,” said CEO Andrew Mason in a letter. “In the past, we’ve made investments in growth that turned a healthy forecasted quarterly profit into a sizable loss. When we see opportunities to invest in long-term growth, expect that we will pursue them regardless of certain short-term consequences.”

Groupon is banking on staying ahead of its competitors by constantly reinventing itself. It has recently begun a new service called Groupon Now that brings real-time location-based deals to users. That has been bulked up by an investment in technology. But the company believes it will need to move in a number of directions as the business unfolds and matures.

A big IPO from Groupon, which could be worth at least $25 billion, could further catalyze the public markets following the recent debut of LinkedIn. It might also entice more holdouts like Facebook, Zynga and Twitter to follow. Pandora also filed for its IPO today. Though with Groupon still far from profitability and spending a bunch on user acquisition it might also give rise to questions about how frothy this tech boom is getting.

Groupon has always been vulnerable to competition because its model can be easily copied. And increasingly it has to go toe-to-toe with huge Internet companies that are starting slowly but could bring in a lot of reach as well as a ton of insight into their own users. At this point, Groupon knows that even with almost $1 billion in new funding, it needs to bulk up if it wants to stay ahead of the competition. The move into instant deals with Groupon Now is a good first step in reshaping the company but it needs to continue to be more local and mobile. And that might require more acquisitions along the lines of Groupon’s pick up of Pelago.

Mason has sounded confident and irritated by the army of “clones” he faces. And while none of them have the ability right now to dethrone Groupon, they’re just getting started. In his letter, Mason dismissed the idea that Groupon is focused on the competition saying companies don’t lose to the competition but to themselves. But with this new money, it’s clear that it’s going public in a bid to ensure it has the muscle necessary to stay at the head of the pack.

Post and thumbnail photos courtesy of Flickr user basykes

  1. Groupon’s getting some $ while the geting is good. They’re smart, they know they can’t drive their valuation much further….$644M revenue Q1 and losing money? IS that funny money revenue — e.g. the gross dollars paid for all deals, of which Groupon gets what 50%?

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