September 26, 2011, 2:48 PM

Showing some competitive bruises, Groupon plows toward an IPO

The daily deal leader is spending more to acquire new subscribers.

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The timing of Groupon Inc.’s initial public offering remains uncertain as the daily deal leader faces a number of challenges, say experts.

Among the challenges is scrutiny from the U.S. Securities and Exchange Commission, which led Groupon on Friday to amend its offering filing to shrink its reported revenue 56.1% for 2010 to $312.9 million from $713.4 million. The filing—which is the company’s second amended filing—included parts of a widely leaked letter written by CEO Andrew Mason to employees that fired back at the company’s critics despite the company being in a quiet period ahead of its IPO.

Groupon  also announced last week that its chief operating officer Margo Georgiadis, who arrived at the daily deal site in April after working at Google Inc., resigned to return to the search giant.

“Georgiadis’s departure, coupled with the restatement, confirms the narrative that things aren’t going so well for Groupon,” says Greg Sterling, founder of Sterling Market Intelligence.

According to the filing, Groupon’s financials show that because of the company’s net losses the company needs to raise money, which is likely why it is plowing ahead with its IPO. “The market is in miserable shape right now so they may delay the IPO until next year,” he says. “But the filing shows that they need to raise money—either privately or through the IPO.”

While Georgiadis’s tenure was brief, and followed the fleeting, roughly one-year tenure of president and chief operating officer Rob Solomon, the most troubling part of the announcement was that she left to work at Google, says Lou Kerner, vice president of equity research at Wedbush Securities.

That’s because Google is positioning itself to be one of Groupon’s biggest rivals, he says. Google launched its own daily deal program, Google Offers, in April and recently began experimenting with ways to promote its deals, such as featuring a link to an offer on its home page and integrating Offers into Google Wallet, its wireless mobile payments system. And the search giant has the resources to bolster Offers using its other products, such as search, Places and the new Google+ social network. 

“On its face the chief operating officer abruptly leaving doesn’t look good,” says Kerner. “But for that executive to go to your biggest competitor is devastating on several levels. She knows how the hamburger is made.”

Moreover, Google Offers, which is operating only in nine cities, is growing rapidly. In markets where Offers has been live for at least a month, it is selling more vouchers per deal than both Groupon and LivingSocial, according to data compiled by daily-deal aggregator Yipit. From Sept. 1 to Sept. 21, Offers sold 893 vouchers per deal in Portland, OR, New York, San Francisco and Oakland/East Bay, compared to 736 vouchers per deal for Groupon and 372 for LivingSocial. Yipit estimates that Offers’ combined revenue in those four markets from Sept. 1 to Sept. 21 was $385,000, up 45.3% from $265,000 in the entire month of August. Google has not disclosed the revenue it derives from voucher sales.

Offers’ growth is due, in part, to Google working with high-profile national and local brands. For example, in Portland, Google featured a Fandango offer that sold more than $80,000 worth of movie tickets. That type of offer generates revenue while also building buzz and capturing new users, wrote Jim Moran, Yipit president and chief operating officer, in a blog post.

Meanwhile, Groupon’s revised initial public offering filing shows that the cost of adding new subscribers continues to rise while the average revenue generated per subscriber falls. In 2009, Groupon’s average cost to acquire a new subscriber was $2.52. In the second quarter that amount rose to $5.23. And in June 2010 the average revenue generated per subscriber was $9.60. A year later that amount had decreased to $8.30.

However, those figures are difficult to evaluate because the market is so new, says Kerner. “The big question is, ‘What’s the lifetime value of a subscriber relative to cost of acquisition?’ It’s difficult to tell. We know what the average cost is, but we have less of a sense of the incremental cost,” he says.

Adding to the difficulty of how to determine that lifetime value is Groupon’s development of new products, such as the location-based mobile discount service Groupon Now. “Expect us to make ambitious bets in technology and product innovation that distract us from our current business,” wrote Mason in the filing. “Some bets we’ll get right, and others we’ll get wrong, but we think it’s the only way to continuously build exciting products.”

The filing notes Groupon increased its subscriber count from 83 million as of March 31 to 116 million at June 30. And because it remains the leader in the space, its initial public offering remains attractive to many investors at the right price, says Kerner. “It’s still a very attractive company—depending on the valuation.”

But not everyone is convinced that investors are still clamoring for Groupon’s IPO. Sterling says the issues raised by Georgiadis’s departure and the restatement will likely cause some investors to sit out the IPO.

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