When Groupon reported its Q1 2012 earnings yesterday, investors rejoiced: Greater than expected revenue growth and a small operating profit propelled the stock up 25.6 percent since Friday.
My boss rejoiced the loudest, saying, "Funny how quiet all those people who said Groupon was a Ponzi Scheme have gotten all of a sudden."
Unfortunately, "those people" may still be in the right.
Groupon's Q1 numbers do not fundamentally alter our understanding of the company's business—which still isn't profitable on a GAAP basis—because there's $60 million in cash sitting on Groupon's books that doesn't belong to Groupon.
In other words, Groupon only turned a $39.6 million operating profit if you ignore its unpaid bills.
The fundamentals
It is true that the underlying fundamentals—operating costs vs. revenues—improved at Groupon this quarter. But Groupon has seen those fundamentals improve before (in Q3 2011 for instance), only to see them deteriorate again the next quarter. It is not clear whether Groupon is trending toward permanent profitability, or whether that trend will emerge before the company experiences its first decline in revenues, which would threaten its precarious cashflow position.
Here's how Groupon's revenue is trending against its operating costs (click to enlarge):
Sure, there's a case to be made that its red revenues line is progressing smoothly upward while the company wrestles its green costs line downward. Groupon reduced its marketing costs but more than doubled its sales and admin costs. The result: A close call.
That close call produced a $39.6 million operating profit. After tax, however, it was a $3.5 million loss.
Crucially, this chart ignores what's happening on Groupon's cashflow statement (which describes its actual use of cash and not its "official" numbers). Groupon has positive cashflow in large part because it has $46 million in unpaid accounts payable to merchants, and another $13.4 million in unpaid bills to various other support vendors.
To take the most cynical view, Groupon ended Q1 about $60 million in the hole.
That positive cashflow, which Groupon can only demonstrate if its revenues keep rising, will reverse itself quickly if Groupon ever experiences a period of declining revenue. For perspective, both Facebook and Google have been through such periods, but because their business models are fundamentally sound nothing bad happened.
On that issue, the jury remains out on Groupon.
