Business context and reporting period
Groupon, Inc. operates online local-commerce marketplaces connecting consumers with merchants. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. Results are from continuing operations unless noted. Groupon reported two segments: North America and International.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $634.5 | $686.6 | $1,970.7 | $2,108.8 |
| Gross profit | $309.4 | $293.3 | $946.9 | $928.7 |
| Operating income (loss) | $(1.2) | $(24.8) | $(20.3) | $(109.7) |
| Net income (loss) attributable to Groupon | $0.1 | $(38.0) | $(33.7) | $(142.0) |
| Adjusted EBITDA (non-GAAP) | $46.6 | $32.6 | $144.7 | $99.7 |
| Operating cash flow, continuing operations | $23.9 | $(39.9) | $(133.1) | $(165.7) |
| Free cash flow (non-GAAP) | $9.6 | $(52.6) | $(176.8) | $(214.7) |
Gross margin, calculated as gross profit divided by revenue, was approximately 48.8% in Q3 versus 42.7% a year earlier, and 48.1% for the nine months versus 44.0%. Basic and diluted earnings per share were $0.00 in Q3 and $(0.06) year to date.
At September 30, cash and cash equivalents were $638.7, down from $863.0 at year-end 2016. Current assets were $816.8 versus current liabilities of $948.8. Groupon had $250.0 of 3.25% convertible notes outstanding at face value (net carrying amount $187.0); the notes mature April 1, 2022. The $250.0 revolving credit facility had no borrowings outstanding, with $16.5 of letters of credit drawn. The filing states Groupon was in compliance with its covenants. The facility requires at least $400.0 of unrestricted cash, including $200.0 at lender institutions. Capital lease obligations totaled $42.4.
Material changes versus the prior comparable period
- Q3 revenue fell 7.6%, while gross profit rose 5.5%; year-to-date revenue fell 6.5% and gross profit increased 2.0%. Management attributed much of the revenue decline to reduced direct Goods sales as it shifted focus toward Local and lower-margin merchandise offerings.
- Q3 gross billings increased 1.4% to $1,341.5; nine-month gross billings decreased 0.5% to $4,063.7. Third-party revenue rose, while direct revenue declined. Units fell to 44.1 million in Q3 from 44.4 million and to 134.3 million year to date from 137.8 million.
- Active customers for the trailing 12 months were 49.1 million versus 45.7 million, including approximately 0.7 million from LivingSocial. Gross billings and gross profit per average active customer declined to $119.57 and $27.35, respectively, from $127.25 and $28.72.
- Marketing expense rose 19.7% in Q3 to $101.5 and 10.4% year to date to $288.5. SG&A declined 8.3% in Q3 to $214.8 and 10.4% year to date to $677.1, mainly due to restructuring-related headcount reductions.
- Cash used in operating activities improved year over year, but remained substantial year to date. The $197.8 decrease in accrued merchant and supplier payables was a major cash use.
Outlook, commentary, risks and unusual items
- Groupon provided no specific revenue or earnings guidance. Management expected elevated marketing investment to continue through the remainder of 2017 and forecast marketing as a percentage of segment gross profit to rise versus 2016. It expected Q4 SG&A to decline year over year and believed available cash and operating cash generation would be sufficient for at least the next 12 months.
- The company said it was prioritizing Local offerings and developing voucherless, card-linked deals and appointment-booking features. Voucherless transactions could reduce reported gross billings and affect working-capital cash flows; their ability to increase purchase frequency or gross profit is uncertain.
- Groupon decided to cease most food-delivery operations and entered a long-term U.S. delivery arrangement with Grubhub. It sold certain food-delivery customer lists and intangible assets, recognizing a $17.1 gain on $19.8 of net proceeds; Q3 restructuring costs related to ending food delivery were $2.6.
- Restructuring charges were $11.5 in Q3 and $18.8 year to date. Approximately 400 employees were terminated in Q3 and approximately 750 year to date; the company said the restructuring program was substantially complete.
- Other income included $7.6 of gain on an investment sale and $8.2 of net foreign-currency gains in Q3; year-to-date foreign-currency gains were $19.1. These helped offset interest expense and fair-value investment losses. The Q3 effective tax rate and year-to-date tax expense were affected by losses in jurisdictions with valuation allowances.
- Risks include cybersecurity incidents, merchant and customer retention, competition, currency movements and execution of the strategy. The filing identifies ongoing intellectual-property, consumer and privacy disputes, including IBM litigation. Groupon estimated reasonably possible obligations under Latin America disposition indemnities of up to $25.0 and said up to $36.1 of unrecognized tax benefits might decrease within 12 months.
- The company had an ongoing strategic review. Subsequent to quarter-end, it appointed Steve Krenzer as COO and announced board changes. No material change to previously reported risk factors was otherwise identified, apart from added disclosure on cybersecurity and voucherless-offering risks.
Important facts for investors to verify
- Whether Local growth and higher gross profit can offset declining revenue, Goods sales and per-customer spending.
- Whether increased marketing produces durable customer and gross-profit growth, and how the company measures returns on that spending.
- Cash conversion and working-capital trends, particularly merchant and supplier payments, seasonal Goods activity and the effects of scaling voucherless deals.
- Liquidity and covenant headroom against the facility’s $400.0 minimum unrestricted-cash requirement, alongside the cash balance, repurchases and continuing cash outflows.
- Outcomes and potential costs of the strategic review, Grubhub arrangement, litigation, tax audits and disposition-related indemnities.