Groupon, Inc. — Q3 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2016. Groupon operates online marketplaces connecting consumers with merchants; its segments are North America, EMEA, and Rest of World. Unless noted, comparisons are with 2015 continuing operations. Ticket Monster was classified as discontinued operations in 2015, so reported 2015 net income included a substantial disposition gain.
Financial performance and liquidity
- Revenue: Q3 revenue was $720.5 million, up 1.0%; nine-month revenue was $2.208 billion, up 0.3%. Direct revenue rose 6.0% in both periods, while third-party revenue fell 6.8% in Q3 and 8.5% year to date.
- Gross profit and margin: Q3 gross profit was $314.1 million, down 4.5%, with a 43.6% margin versus 46.1%. Nine-month gross profit was $987.0 million, down 2.6%, with a 44.7% margin versus 46.0%.
- Profitability: Q3 operating loss was $26.7 million and net loss attributable to Groupon was $38.0 million, versus $70.4 million and $27.6 million, respectively, in 2015. Nine-month operating loss was $117.2 million and net loss attributable to Groupon was $142.0 million, versus $74.4 million of operating loss and $67.2 million of net income in 2015. The prior-year nine-month net income included $133.5 million from discontinued operations. Diluted loss per share was $0.07 for Q3 and $0.25 year to date.
- Adjusted EBITDA: Non-GAAP Adjusted EBITDA was $32.1 million in Q3 versus $56.3 million; nine-month Adjusted EBITDA was $97.4 million versus $189.8 million.
- Cash flow: Continuing-operations operating cash flow was negative $40.8 million in Q3 and negative $171.6 million for nine months, versus negative $7.6 million and positive $49.3 million in the comparable periods. Free cash flow, a non-GAAP measure, was negative $53.7 million in Q3 and negative $220.8 million year to date, versus negative $35.4 million and negative $19.2 million.
- Cash and liquidity: Cash and cash equivalents were $689.7 million at September 30, down from $853.4 million at year-end 2015. Current assets were $909.1 million and current liabilities $984.5 million, a $75.4 million working-capital deficit.
- Debt: Groupon issued $250 million of 3.25% convertible senior notes; the balance-sheet carrying value was $176.5 million after debt discount. No revolving-credit borrowings were outstanding. The amended revolver provides up to $250 million through June 2019; the company reported covenant compliance and an obligation to maintain at least $400 million of unrestricted cash, including $200 million at lender-related accounts.
Material changes versus the prior comparable period
- Gross billings declined 2.4% in Q3 and 3.3% year to date, despite reported revenue being nearly flat. Q3 active customers rose to 50.8 million from 48.6 million, but trailing-twelve-month gross billings per average active customer declined to $122.82 from $131.72; units sold also fell.
- North America revenue increased 4.2% in Q3 and 5.3% year to date, while EMEA revenue fell 1.4% and 5.8%, and Rest of World revenue fell 19.4% and 21.6%, respectively.
- Marketing expense increased 42.7% in Q3 and 57.6% year to date, reflecting customer-acquisition investment. SG&A fell 22.3% in Q3 and 10.3% year to date, in part due to restructuring and the absence of the prior-year securities-litigation charge.
- Cash used in operations worsened, driven largely by a $171.8 million decrease in accrued merchant and supplier payables, as well as operating losses and funding of the securities-litigation settlement.
Outlook, management commentary, risks and unusual items
- Management expects $130 million to $150 million of incremental marketing expense in full-year 2016 versus 2015, focused primarily on North America, and has extended customer-acquisition return thresholds to 12–18 months from about six months. It expects SG&A to generally decline through the remainder of 2016 and during 2017. Management expects Q4 year-over-year improvement in direct Goods gross margins.
- Groupon said available cash and expected operating cash flows should be sufficient for working capital and capital expenditures for at least the next 12 months, while also warning that 2016 operating cash flow would be significantly lower than in prior years.
- The company is focusing on 15 core countries and pursuing strategic alternatives for 11 others. It had ceased operations in six Rest of World and 11 EMEA countries as part of restructuring; cumulative restructuring costs reached $52.2 million through September 30, 2016.
- Management cited the stronger U.S. dollar and Brexit-related sterling weakness as risks to international results, and expected an adverse effect on EMEA gross billings in Q4. Other stated risks include competition, customer and merchant retention, cyber security, payment and refund exposure, litigation, regulation, and the execution and benefits of restructuring.
- On October 24, 2016, Groupon agreed to acquire LivingSocial, with closing expected by early November and consideration described as not material. The securities class action settlement was finally approved and satisfied in Q3; other matters include pending IBM patent claims and derivative litigation settlement terms still being negotiated. Tax audits could result in changes of up to $24.9 million in unrecognized tax benefits within 12 months.
- The filing reports the notes’ maturity as April 1, 2022 in the financing note, but refers to them as due 2020 in the liquidity discussion. This inconsistency should be checked against the indenture and filed agreements.
Most important facts for investors to verify
- Whether increased marketing spend generates durable customer activity and improves gross billings per customer, Adjusted EBITDA, and cash flow.
- Drivers and sustainability of the sharp deterioration in operating cash flow and free cash flow, especially merchant and supplier payment timing and seasonal Goods working capital.
- Progress and costs of country exits, the strategic alternatives process, and the LivingSocial acquisition and its integration.
- Revolver covenant headroom and minimum-cash requirements, and the convertible notes’ actual maturity, conversion terms, and potential dilution.
- Developments in IBM and derivative litigation, tax audits, and foreign-exchange exposure, including sterling weakness.