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Jim Edwards
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Twitter.BiographyJim Edwards Jim Edwards, a former managing editor of Adweek, has covered drug marketing at Brandweek for four years and is a former Knight-Bagehot fellow at Columbia University’s business and journalism schools.
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.View more ..Groupon (GRPN) appears to be asking would-be IPO investors to accept an accounting trick in order to believe that is is profitable. In his introductory note to the company’s public-offering filing, founder Andrew Mason writes, “Life is too short to be a boring company.” Judging by the numbers he presents, he’s already delivering on that promise.

The email coupon company’s top-line financials are impressive: in Q1 2011 it saw $644.7 million in revenues from 83.1 million users. It is the company’s bottom line that’s the problem: Despite almost equaling the entire revenue of 2010 in just the first quarter of this year, Groupon still showed a net loss of $114 million.

Mason, however, wants investors to concentrate on something he calls “Adjusted Consolidated Segment Operating Income.” On that measure, Groupon saw income of $82 million in Q1. But this is a fiction, as the company admits, because it generates that “income” by ignoring some of the major costs of Groupon’s business, particularly its gargantuan marketing budget.

Pay no attention to the marketers behind the curtain

The reason Groupon is so far from making money despite running what is clearly a massive and growing business is because Groupon is paying dearly for that growth. In Q1, it spent $208 million on marketing, of which $179.9 million went for online marketing to acquire users from social networking sites and search engines.

Another $179 million went largely to grow Groupon’s sales force. Yet Mason wants you to pay no attention to all those marketers behind the curtain. The IPO offering asks instead that you concentrate on “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.

In addition to not counting marketing, “Adjusted CSOI” excludes interest, taxes, or non-income cashflows like changes in accounts payable. In other words, Groupon is “profitable” as long as you ignore all the expenses it must make to keep going. By amazing coincidence, if you do ignore all that, then Groupon’s business is improving dramatically: