Henry Blodget knows a thing or two about securities violations. During the dot-com boom he rose to the the position of number one Internet analyst at Merrill Lynch. Bu after the bubble burst, he was indicted by Elliot Spitzer for securities fraud, when emails emerged that showed him bad mouthing stocks in private that he was pumping up in public. Mr. Blodget agreed to pay $4 million in total and was banned from the securities business for life.
Today Mr. Blodget, in his reincarnation as a tech blogger at Business Insider, pointed out what he saw as a suspicious series of events. Groupon, which has filed for an IPO, has been taking a lot of heat from both the press and the SEC over its unique accounting methods. Because of the SEC’s “quiet period”, which prohibits companies who have filed for IPO from promoting themselves, Groupon cannot defend itself publicly.
But Blodget argues that, “The clever method Groupon is using to try to get around the SEC’s quiet period rule is writing a detailed public communication in the form of a CEO “letter to employees” that Groupon has then distributed publicly with the help of a trusted media outlet.”
The media outlet in question is All Things D and the reporter is Kara Swisher, who routinely publishes internal communications from companies like Groupon and Yahoo before anyone else. Asked over Twitter if he was implicating Kara Swisher in an SEC violation, Mr. Blodget demurred. “I’m not “implicating” her at all! Reporters make deals like this all the time. The email is interesting and newsworthy.”
Betabeat reached out to Ms. Swisher for comment. She responded by email:
Henry never called me to ask how I got the email, as is his usual practice. I would not have commented I guess, but a call would have been nice before writing that out of thin air. So not sure how to respond, except that he always seems to publish nearly each and every memo I manage to get, in any case.Andrew (Mason, Groupon CEO), I can say, was surprised when I called him to comment about it.I made no “deal” with Groupon. Another fiction from Henry, who seems to like to make stuff up.
The internal Groupon email from CEO Andrew Mason is copied below for context.
This weekend, I did a Google News search on our company — my first in awhile. The first story that popped up was called The Fall of Groupon: Is the Daily Deals Site Running Out of Cash? I laughed when I read the headline (in the car by myself, weirdly). First — with this article, the degree to which we’re getting the shit kicked out of us in the press had finally crossed the threshold from “annoying” to “hilarious.” Second, I was struck by the irony — I had just finished a board meeting last Wednesday saying this to myself: I’ve never been more confident and excited about the future of our business.
I realize that this sounds like the kind of thing that CEOs say when they’re trying to pep people up. First of all — I’m all about not pepping people up. If you don’t believe me, just ask my fiancée, Jenny “why don’t you ever say anything nice about me” Gillespie. Want another example? Look at the magazine covers in our lobby, which are there to make you sad by reminding you of the impermanence of success.
I’m going to spend the rest of this email explaining why I’m so excited. You need some ammo to argue back against your blog-reading “friends” (silently argue in your mind, that is — you can’t actually say any of this yet), and I’ve been told that the “what have you ever done with your life that’s so great?” rebuttal isn’t working as well for you guys as it has for me.
While we’ve bitten our tongues and allowed insane accusations (like in the article above) to go unchallenged publicly, it’s important to me that you have the context necessary to brush this stuff off.
I’ll summarize my excitement with four points: 1) Growth in our core business is strong 2) Our investments in the future — businesses like Getaways & NOW — look great, 3) We are pulling away from competition, and 4) We’ve built a great team that I would pit against anyone. In other words, all the stuff that one would want to look good? It looks good.
Many of the long-term unknowns of our business are becoming known, and we like the answers. I will now elaborate in a level of financial detail that will give Jason Child a stomach ulcer.
1. GROWTH IN THE CORE BUSINESS
Thanks to a tremendous effort by our sales team, August in the U.S. is shaping up to be a pivotal month. It appears that will revenues grow by about 12% over last month (which is a lot), while we cut our marketing expenses by 20% in the same period.
Beyond their obvious goodness, these numbers are important because they answer one of the main criticisms thrown at us in the past few months, relating to a metric we put in the S-1 called ACSOI (adjusted consolidated segment operating income) to help people understand how we think about marketing expenses. The reason everyone in the world seems to hate ACSOI is that it makes us look magically profitable by subtracting a bunch of our customer acquisition marketing costs from our expenses. The reason we didn’t realize everyone in the world would hate ACSOI (no, it’s not the same reason we didn’t realize everyone in the world would hate our Superbowl ad), is that we think it actually does a pretty good job at describing our marketing expenses in a steady state –we just didn’t realize there would be so many skeptics. I think it’s worth going deep on this one more time — brace yourself.
Our internal forecast shows two different types of marketing: what I’ll call “normal marketing” — which is NOT excluded from ACSOI — and “customer acquisition marketing,” which is. The way Groupon spends on marketing is unique in three ways:
1. We are currently spending more than just about any company ever on marketing — in Q2, we spent nearly 20% of our net revenue on marketing, while a typical company spends less than 5%. Why do we spend so much? The simple answer is “because it works.” But thats only part of what makes our situation special.
2. Our marketing — at least the customer acquisition marketing that we remove from ACSOI — is designed to add people to our own long-term marketing channel — our daily email list. Once we have a customer’s email, we can continually market to them at no additional cost. Compare this to Johnson and Johnson, McDonald’s, or most other companies. If I’m a Johnson, and I’m trying to sell you a box of Band Aids, I have to keep spending money on commercials and magazine ads and stuff to remind you about how sweet Band Aids are, even after you’ve bought your first box. With Groupon, we just spend money one time to get you on our email list, and then every day we email you a reminder of the sweetness of our metaphorical Band Aid. There is no cost of reacquisition — that’s unusual (and we created ACSOI to point that out). If Johnson wanted to follow the Groupon strategy, he would have to start a free daily newspaper about bandages and then run Band Aid ads in it every day.
3. Eventually, we’ll ramp down marketing just as fast as we ramped it up, reducing the customer acquisition part of our marketing expenses (the piece that we remove in ACSOI) to nominal levels. We are spending a ton now because we’re acquiring as many subscribers as we can as quickly as we can. We aren’t paying attention to marketing budget (just marketing ROI) in the way a normal company would, because we know that even if we wanted to continue to spend at these levels, we would eventually run out of new subscribers to acquire. So our customer acquisition spend drops severely to reflect the fact that eventually we’ll run out of people we can add to our email list. We view this internally as a very large one-time expense and then our job forever after will be to continually convert these subscribers into customers and to make sure our customers keep buying from us. Ongoing, the normal marketing dollars we spend are not something we would remove from our internal calculation of ACSOI.
I tried my best to explain this simply, but it’s not lost on me that if you actually understood this, you probably had to read it three times. It’s not easy stuff. It’s much easier to assume that we’re goons. So people can be forgiven for being suspicious. In fact, feel a little bad about how downhearted the critics will be when we don’t turn out to be a Ponzi scheme — those are good impulses for journalists to have, and I hope our non-evil ways don’t destroy their spirits.
Anyway, there’s a reason that I just went on about ACSOI. One of the questions that skeptics ask is, “when you ramp down marketing, won’t revenues stop growing as well? Aren’t you just buying growth?” Over the past several months we’ve been consistently reducing our marketing spend and yet revenues are still increasing at a significant pace. In Q1 of this year, marketing represented 32.3% of our net revenues. By the end of Q2 it had fallen to 19.4%. And it has continued to fall over the past several months all because we’ve been investing in our own long-term marketing channel — our email list.
Internationally we see the same trends — marketing is down, but revenues are up — every country is either losing less or making more. Even in young markets like Korea, where we’re still making massive investments, we’re seeing unprecedented growth. We started building our Korean team this January, despite the presence of two competitors that were larger than any we’d previously battled from behind. Thanks to the brilliant execution of the Korean team, we are set to be the market leader within months. We’ve never had a country grow as fast as Korea!
What about our joint-venture with Tencent in China? Did you read the article that Gaopeng’s CEO has kidnapped the first born children of all our employees and is putting them to work building a laser beam he’ll use to slice the moon in half? It turns out that that one isn’t true either. China is definitely a different market, but every month we inch closer to profitability. As has been our strategy in launching other countries — Germany, France, and the UK, included — our China growth strategy was to hire quickly and manage out the bottom performers. So far, that strategy has improved our competitive position in China from #3,000 to #8. Will we one day reach the dominant status we enjoy in most (come on, Switzerland!) other countries? It’s too soon to tell, but there’s no question in my mind that we’re building a business that will be around for the long haul.
2. NEW BUSINESS LINES ARE BOOMING
Travel and Product are enormous opportunities. After only a few months, they’re already making up 20% of revenue in some countries. We sold $2M worth of mattresses in the UK — in one day! Groupon Getaways will do $10M in its first calendar month — which you might think is awesome, but we’re actually disappointed with those results because we know how much better we’ll be doing soon.
While there’s still a ton of work to do, Groupon Now! continues to see weekly double digit growth. The model works and I believe it will play a major part in the future of our global business as more merchants and customers join the marketplace.
3. WE ARE PULLING AWAY FROM COMPETITION
If there’s a question I’ve received from Groupon skeptics more than any other, it’s, “how will you fend off the competition — especially massive companies like Google and Facebook?” I could give a dozen reasons to bet on Groupon, but it’s impossible to predict the future or the actions of others. Well, now the sleeping giants have woken up — and the numbers are showing that what was proven true with literally thousands of other competitors is just as true with the incumbents of the Internet: it’s kind of hard to build a Groupon. And since anyone with an Internet connection can track the performance of our competitors, I can be more specific:
Google Offers is small and not growing. In the three markets where we compete, we are 450% of their size.
Yelp is small and not growing. In the 15 markets where we compete, our daily deals are 500% of their size.
Living Social’s U.S. local business is about 1/3rd our size in revenue (and smaller in GP) and has shrunk relative to us in the last several months. This, in part, appears to be driving them toward short-sighted tactics to buy revenue, like buying gift certificates from national retailers at full price and then paying out of their own pocket to give the appearance of a 50% off deal. Our marketing team has tested this tactic enough to know that it’s generally a bad idea, and not a profitable form of customer acquisition.
Facebook sales are harder to track, but are even less significant at present.
My point is not that our competitors will fail — some may actually develop sustainable businesses, or even grow — after all, local commerce is an enormous market. The real point is that our business is a lot harder to build than people realize and our scale creates competitive advantages that even the largest technology companies are having trouble penetrating. And with the launch of NOW, I suspect our competition will have an even harder time in light of the natural barriers to entry that are needed to build a real-time local deals marketplace.
4. OUR TEAM
This is the fluffiest of the four points, but maybe the most important — we’ve built a global team of hungry entrepreneurial operators and seasoned executives that rivals any team I know of. Almost every day, I find myself in a scenario where I silently think, “I can’t believe I got this person to work for me — that failure of judgement is perhaps their single flaw.”
I point out the team because while today the business is strong and it appears we must endure success for awhile longer (despite its impermanence), we will inevitably be challenged with issues we didn’t predict — and when that happens, the quality of our team will be a deciding factor in our ultimate long-term success.
I wrote this email because when I read some of the press this weekend, I realized a rational person could read this stuff and wrongly conclude that we’re in trouble. The irony is hopefully clear: We’ve never been stronger.
And while we’ve refrained from defending ourselves publicly, you’ve continued to create our best defense, with every department innovating new practices that are taking our business to the next level. Thanks for staying tough, determined, and agile throughout this process. For now we must patiently and silently endure a bit more public criticism as we prepare to birth this IPO baby — a breed for which there are no epidurals. If there’s a silver lining, it’s that we’re almost on the other side, and the negativity leaves us well-positioned to exceed expectations with an IPO baby that, having seen the ultrasound, I can promise you is not one of those uglies.
I’ve been as candid as possible — hope this sheds some light on things. Reply with your questions if anything remains unclear. Amidst all this, I hope you remember what we’re doing here — we are making history together. I guess you don’t get to build something that reshapes the local commerce ecosytem without getting a few bruises. I’m so proud of the work we’re doing, and I feel extraordinarily lucky to work on what I think is the best thing that’s happened to small businesses since the telephone We’ve invented something that is catalyzing millions of dollars of local commerce every single day in 45 countries and fills the lives of millions of customers with unforgettable experiences — it’s pretty remarkable.
Looking forward to getting this behind us!
P.S.: I almost forgot to address the nonsense about us running out of money in the article above. If you apply the same logic used in the article, you’d have concluded long ago that companies like Amazon and Wal-Mart were running out of cash too. Both have often had payables far in excess of their cash. Finance geeks call this a working capital deficit. It’s normal, manageable and a lot of folks actually believe it’s good thing and would kill to get paid from their customers long before they have to pay their suppliers. We are generating cash, not losing it — we generated $25M in cash last quarter alone, adding to the $200M we had before. In other words, we’re doing the opposite of running out of money.