Groupon 2013 Annual Report Download - page 42

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("U.S. GAAP") and certain of these metrics are considered non-GAAP financial measures. As our business evolves, we may make
changes to our key financial and operating metrics used to measure our business in future periods. For further information and a
reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial
Measures in the "Results of Operations" section.
Financial Metrics
• Gross billings. This metric represents the total dollar value of customer purchases of goods and services, excluding
applicable taxes and net of estimated refunds. For third party revenue deals, gross billings differs from third party
revenue reported in our consolidated statements of operations, which is presented net of the merchant's share of the
transaction price. For direct revenue deals, gross billings are equivalent to direct revenue reported in our consolidated
statements of operations. We consider this metric to be an important indicator of our growth and business performance
as it is a proxy for the dollar volume of transactions generated through our marketplaces. Tracking gross billings on
third party revenue deals also allows us to track changes in the percentage of gross billings that we are able to retain
after payments to our merchants.
• Revenue. Third party revenue is derived from deals where we act as the marketing agent and is the purchase price
paid by the customer less an agreed upon portion of the purchase price paid to the featured merchant, excluding
applicable taxes and net of estimated refunds for which the merchant's share is recoverable. Direct revenue, when
the Company is selling the product as the merchant of record, is the purchase price paid by the customer, excluding
applicable taxes and net of estimated refunds.
• Gross profit. Gross profit reflects the net margin earned after deducting our cost of revenue from our revenue. Due
to the lack of comparability between third party revenue, which is presented net of the merchant's share of the
transaction price, and direct revenue, which is reported on a gross basis, we believe that gross profit is an important
measure for evaluating our performance.
• Operating income (loss) excluding stock-based compensation and acquisition-related expense (benefit), net.
Operating income (loss) excluding stock-based compensation and acquisition-related expense (benefit), net is a non-
GAAP financial measure that comprises the consolidated total of the segment operating income (loss) of our three
segments, North America, EMEA and Rest of World. compensation expense and
expense (benefit), net are excluded from segment operating income (loss) that we report under U.S. GAAP for our
segments. Stock-based compensation expense is primarily a non-cash item. Acquisition-related expense (benefit),
net is comprised of the change in the fair value of contingent consideration arrangements and, beginning in 2013,
also includes external transaction costs related to business combinations, primarily consisting of legal and advisory
fees. We have used consolidated operating income (loss) excluding stock-based compensation and acquisition-related
expense (benefit), net to allocate resources and evaluate performance internally. However, in recent periods, our
management and Board of Directors have increasingly focused on Adjusted EBITDA, described below, as the primary
non-GAAP measure for evaluating our consolidated operating results. Accordingly, we do not expect to continue
to report Operating income (loss) excluding stock-based compensation and acquisition-related expense (benefit),
net on a consolidated basis in future periods. For further information and a reconciliation to the most applicable
financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the "Results
of Operations" section.
• Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that comprises net income (loss) excluding
income taxes, interest and other non-operating items, depreciation and amortization, stock-based compensation and
acquisition-related expense (benefit), net. Adjusted EBITDA is similar to Operating income (loss) excluding stock-
based compensation and acquisition-related expense (benefit), net, except Adjusted EBITDA also excludes
depreciation and amortization. We exclude depreciation and amortization because it is non-cash in nature, and we
believe that non-GAAP financial measures excluding these items provide meaningful supplemental information
about our operating performance and liquidity. Our definition of Adjusted EBITDA may differ from similar measures
used by other companies, even when similar terms are used to identify such measures. We believe that Adjusted
EBITDA is a meaningful measure for evaluating our operating performance. For further information and a
reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP
Financial Measures in the "Results of Operations" section.
• Free cash flow. Free cash flow is a non-GAAP financial measure that comprises net cash provided by operating
activities less purchases of property and equipment and capitalized software. We use free cash flow, and ratios based
on it, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe