Groupon sells “Groupons” that allow its customers to eventually go and get something from the merchant that issues the Groupon.
When Groupon sells a Groupon–say, a $25 coupon for $50 of belly-waxing services–Groupon collects the $25 immediately (from the subscriber’s credit card). Then, sometime later, the subscriber generally goes to the belly-waxing salon and gets his or her belly waxed. And, sometime after that, Groupon remits a portion of the $25 to the belly-waxing salon.
What this means is that, when Groupon is growing rapidly, as it is now, it collects a ton of cash from its subscribers long before it has to deliver some of the cash to its merchant partners. And that generates positive cash flow.
This is how Groupon can generate cash even when it is “losing money” on its income statement.
The full-year cash flow statement for 2010 illustrates this.
Groupon “lost” $413 million in 2010 on its income statement. In the same year, however, it generated $72 million of cash.
The benefit of positive cash flow is that Groupon’s operations can fund the company’s growth even while the company is losing money.
Of course, the benefits of this positive “cash-cycle” won’t last forever. When Groupon’s growth slows, the cash that it has to deliver to the merchants that did Groupons last quarter will start to equal (or even exceed) the cash that Groupon collects from customers who buy Groupons this quarter, and the company’s cash-flow statement will look more like its income statement.
(Amazon went through this transition, too, and it can be a painful one.)
In other words, at some point, unless/until it turns profitable on an income statement basis, Groupon will have a cash hole to fill. And the only way it can sustain its positive cash flow while losing money on the income statement is to keep growing rapidly. If the growth stalls before the company turns profitable, cash flow will turn sharply negative.
But, for now, even though Groupon is “losing money,” it is generating cash. And it can use this cash to fund operations and growth.