Groupon, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. Groupon operates a two-sided marketplace across North America and International, with Local, Goods and Travel categories. The filing attributes the sharp deterioration in local and travel activity to COVID-19.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $395.6 | $532.6 | $769.8 | $1,111.0 |
| Gross profit | $137.2 | $292.1 | $338.5 | $598.1 |
| Gross margin | 34.7% | 54.8% | 44.0% | 53.8% |
| Operating income (loss) | $(72.1) | $(7.1) | $(270.0) | $(4.9) |
| Net income (loss) attributable to Groupon | $(72.1) | $(40.2) | $(285.6) | $(82.7) |
| Adjusted EBITDA (non-GAAP) | $1.3 | $46.5 | $(21.1) | $93.5 |
| Operating cash flow | $87.1 | $(1.2) | $(149.3) | $(148.7) |
| Free cash flow (non-GAAP) | $72.8 | $(17.9) | $(174.2) | $(182.9) |
Q2 revenue fell 25.7% year over year; service revenue declined to $112.4 million from $277.6 million, while product revenue rose to $283.3 million from $255.0 million. Q2 gross profit fell 53.0%. Gross billings decreased 48.0% to $582.7 million, units declined 34.8% to 23.0 million, and trailing-twelve-month active customers fell 17.6% to 38.0 million.
At June 30, cash and cash equivalents were $784.7 million; current assets were $891.4 million and current liabilities $886.9 million. Total equity was $117.5 million. Debt included $200.0 million outstanding on the revolving facility and $250.0 million principal on convertible notes (net carrying value $222.0 million); the notes mature April 2022. Q2 operating cash flow was positive, but first-half operating and free cash flow were negative. First-half operating cash use included a $99.2 million net working-capital and other-assets/liabilities outflow. Cash held by international subsidiaries was $151.5 million.
Material changes and management outlook
- COVID-19 impact: Business closures and restrictions significantly reduced demand for Local and Travel offerings from March onward. Both segments saw steep gross-billings declines; International also faced unfavorable currency effects.
- Strategy: Groupon shifted from plans to exit Goods toward phasing it down and transitioning to a third-party marketplace model, with merchants responsible for fulfillment and returns. Management expected the transition in North America by the end of Q3 2020 and globally during 2021. The longer-term priorities are expanding inventory and improving merchant and customer experiences.
- Restructuring: Q2 included $40.5 million of restructuring charges. The first phase covered about 1,300 positions and exits from certain leases and assets. A second phase was planned for August, including further workforce reductions and country-footprint rationalization, with estimated charges of $30–$38 million. Total restructuring charges could reach $105 million through 2021; management expects $225 million in annualized cost savings once the plan is fully implemented.
- Credit facility: A July 17 amendment reduced revolving borrowing capacity from $400 million to $225 million and provided covenant relief through Q1 2021, while introducing minimum quarterly EBITDA and monthly liquidity requirements. At June 30, borrowings were $200 million and letters of credit were $19.2 million. The amendment increased certain interest rates during the relief period and restricts, among other things, repurchases, acquisitions and investments.
- Outlook: Management expected a net loss and negative operating cash flow for full-year 2020, but believed cash balances and operating cash generation would cover working capital and capital expenditures for at least 12 months. It cautioned that the pandemic’s duration and effects were highly uncertain and that liquidity-management actions were not assured of success.
Risks, contingencies and unusual items
- First-half results included $109.5 million of goodwill impairment, $22.4 million of long-lived-asset impairment, $6.7 million of investment impairment and $40.5 million of restructuring charges. Goodwill impairment related to the EMEA reporting unit; further impairment could result from changing conditions or estimates.
- A proposed foreign tax assessment of $113.7 million, including estimated interest, primarily concerns transfer pricing for 2011 transactions. Groupon disputes the assessment and plans to defend itself.
- The company disclosed a securities class action filed April 28, 2020 concerning statements about its business and outlook, along with other intellectual-property, consumer, privacy, employment and regulatory matters. Management said reasonably possible losses above accrued amounts were not expected to be material, while noting litigation can still be costly and disruptive.
- Customer credits rose to $43.8 million from $13.8 million at year-end, and revenue constrained for potentially unredeemed vouchers rose to $22.2 million from $14.6 million. Estimates of future redemptions may affect revenue.
- On June 10, Groupon effected a 1-for-20 reverse stock split; share and per-share figures in the filing are retroactively adjusted. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification points
- Track recovery in Local and Travel demand, gross billings, customer activity and service margins, alongside the ongoing effects of COVID-19.
- Verify progress and realized savings from the Goods transition and restructuring against the stated timelines, charges and $225 million annualized savings target.
- Monitor cash burn, working-capital movements, merchant and supplier payables, and liquidity under the amended credit agreement’s monthly and quarterly requirements.
- Review the timing and outcome of the proposed $113.7 million tax assessment and material litigation, as well as possible additional impairment or voucher-redemption adjustments.
- Assess the quality and comparability of Adjusted EBITDA and free cash flow, which are non-GAAP measures, against GAAP losses and cash-flow statements.