Groupon’s Innovative Accounting: Why CSOI Makes Sense
There are two types of innovative accounting. The good kind helps people understand financial performance. The bad kind obscures financial performance.
The problem is in knowing the difference.
Groupon is the latest company to come under scrutiny for its innovative accounting practices. The SEC is said to be looking into its accounting for “adjusted consolidated segment operating income,” or CSOI.
The company is up-front about its use of this unusual measure and is clear that it still relies on more traditional financial metrics. From its S-1:
There are three main financial metrics that we track closely. First, we track gross profit, which we believe is the best proxy for the value we're creating. Second, we measure free cash flow—there is no better metric for long-term financial stability. Finally, we use a third metric to measure our financial performance—Adjusted Consolidated Segment Operating Income, or Adjusted CSOI. This metric is our consolidated segment operating income before our new subscriber acquisition costs and certain non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term growth.
It appears the company uses CSOI to get a sense of profits for the day when it turns off or slows its advertising push.
Critics have say CSOI measures performance in a fantasy land that ignores Groupon’s ballooning marketing costs associated with acquiring new customers.
Yet Groupon’s use of this strange metric may have more to do with its assessment of external market conditions than of its own internal operations.
Groupon is marketing like crazy now to secure its spot as the market leader. It wants to differentiate itself from its legion of competitors including LivingSocial, BuyWithMe and a handful of other offerings from sites such as Amazon and Yelp. Again, from the S-1: “We expect competition in e-commerce generally, and group buying in particular, to continue to increase because there are no significant barriers to entry.”
The hope is that a marketing push now may push its weaker competitors out of business and allow it to dominate the group buying category later on. Marketing spend effectively becomes the only barrier to entry Groupon can erect. It won’t need to outspend its competitors forever.
What’s more, Groupon’s use of CSOI is indicative of how it thinks about its 83.1 million email subscribers. To Groupon, marketing is a one-time customer acquisition investment instead of an ongoing expense. Once someone signs up to receive the company’s daily emails, they don’t need further marketing—or so the use of CSOI suggests.
Others may be quick to equate CSOI to the use of “eyeballs” or any number of other similar Dotcom-era slights of hand. Yet there may be real value in this innovative accounting measure down the road. If Groupon can outlast its competitors and retain its existing subscribers, it won’t need to fork over as much for marketing. Then today’s CSOI accounting will be a good thing to compare against the more traditional metrics of cash flow and net income.
Of course it will take some time to see the value in this. Meanwhile, the SEC may be slowing the company’s IPO unnecessarily and spooking other well-meaning creative accountants.