Groupon, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Comparisons are with Q1 2014 and reflect the retrospective presentation of Ticket Monster as discontinued operations. Groupon operates online local-commerce marketplaces across North America, EMEA, and Rest of World.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Revenue | $750.4 million | $728.4 million | Up 3.0%; foreign exchange reduced current-period revenue by $51.3 million versus prior-year rates. |
| Gross profit / margin | $347.4 million / 46.3% | $365.5 million / 50.2% | Gross profit down $18.1 million; margin contraction reflected a higher mix of lower-margin direct Goods sales. |
| Operating income (loss) | $5.3 million | $(6.4) million | Improved as marketing and SG&A costs fell, partly offset by lower gross profit. |
| Continuing-operations loss | $(16.7) million | $(21.8) million | Includes $19.5 million of foreign-currency transaction losses in other expense. |
| Net loss attributable to Groupon | $(14.3) million | $(37.8) million | Q1 2015 included $6.3 million of after-tax income from discontinued operations. |
| Adjusted EBITDA (non-GAAP) | $72.4 million | $45.8 million | Increased; excludes, among other items, stock compensation, depreciation and amortization, taxes, and other expense. |
| Operating cash flow, continuing operations | $40.7 million | $(14.6) million | Improved year over year. |
| Free cash flow (non-GAAP) | $22.4 million | $(30.7) million | Operating cash flow from continuing operations less capital expenditures and capitalized software. |
Liquidity, cash flow, and capital
- Cash and cash equivalents were $975.5 million at March 31, 2015, plus $29.6 million classified within assets held for sale. Cash and equivalents declined $41.1 million during the quarter; foreign exchange reduced cash, including cash held for sale, by $30.2 million.
- Total assets were $2.15 billion and total liabilities were $1.39 billion. Current assets were $1.66 billion and current liabilities $1.26 billion; these totals include balances classified as held for sale.
- No borrowings were outstanding under the $250 million revolving credit facility; Groupon reported compliance with its covenants. Capital lease obligations totaled $33.6 million, including $19.1 million non-current.
- Q1 investing cash outflow was $20.1 million, including $18.3 million for property, equipment, and capitalized software. Financing cash outflow was $32.9 million, including $18.0 million of treasury-stock purchases and $14.6 million of taxes on net share settlements.
Material changes and operating trends
- Direct revenue rose $59.5 million to $390.2 million, while third-party revenue fell $41.7 million to $351.3 million. The mix shift toward direct Goods sales increased reported revenue but did not produce comparable gross profit growth because direct revenue is reported gross and Goods has lower margins.
- Goods represented 55.4% of revenue, versus 50.1% a year earlier. Direct-revenue gross margin improved to 10.0% from 6.5%, while overall gross margin fell.
- North America revenue increased 11% to $479.9 million; EMEA revenue declined 6% to $216.2 million; Rest of World revenue declined 18% to $54.3 million. Reported international results were affected by currency movements.
- Gross billings were $1.552 billion, up 2.1%. Trailing-twelve-month active customers were 48.1 million versus 45.1 million; gross billings per average active customer were $134.62 versus $136.29. Units sold were 53.7 million versus 50.7 million.
- Marketing expense declined to $52.5 million from $69.2 million; SG&A declined to $289.8 million from $300.9 million. Stock-based compensation expense from continuing operations increased to $35.1 million from $22.9 million.
Outlook, transactions, and risks
- Ticket Monster: Groupon classified the Korean business as discontinued operations and held for sale. An April 19, 2015 agreement provides for $285 million cash consideration plus a minority interest in Newco; closing was expected in Q2 2015 and remained subject to conditions, including Korean Fair Trade Commission approval. Management estimated a pre-tax disposal gain of $195 million to $205 million, subject to change. The transaction had not closed as of the filing.
- Groupon expected positive operating cash flow in annual periods for the foreseeable future and believed available cash and operating cash generation would meet needs for at least 12 months. It gave no specific revenue or earnings guidance in this filing. It continued to explore strategic or financing alternatives for certain other Asian markets without assurance of a transaction.
- Management cited competition, merchant and customer retention, deal margins, Goods inventory and fulfillment, refunds, international operations and currency volatility, cybersecurity, and technology execution among business risks. It expects continued investment in technology, marketplaces, sales, and marketing.
- Legal and tax exposures include securities and derivative litigation, intellectual-property claims, and foreign VAT assessments totaling $41.7 million, which Groupon disputed. A previously agreed $8.5 million marketing-practices class-action settlement was vacated on appeal and remanded; the parties could seek reapproval or terminate it. The company could not reasonably estimate reasonably possible losses above accruals for securities and derivative cases.
- Q1 discontinued-operations income included a $26.8 million tax benefit related to Ticket Monster held-for-sale classification, despite a pre-tax discontinued-operations loss of $20.5 million.
- A new $300 million share repurchase authorization was approved in April, effective upon closing of the Ticket Monster transaction. The existing program had $83.0 million remaining at quarter end.
- Management reported disclosure controls effective at quarter end. A new warehouse-management system was implemented without a reported adverse effect on internal controls.
Most important facts for investors to verify
- Whether the Ticket Monster sale closed, the final cash proceeds and retained ownership, and the realized disposal gain versus the stated estimate.
- Whether revenue growth can translate into sustained gross profit and operating income as direct Goods sales and lower-margin merchant deals remain important.
- Whether operating cash flow and free cash flow remain positive after seasonal working-capital movements, capital spending, and foreign-exchange effects.
- The status and potential financial effect of the $41.7 million VAT assessments and significant litigation, including the vacated settlement.
- The conditions attached to the new repurchase program, its funding, and the effect of ongoing stock-based compensation and share repurchases on per-share results.