Groupon, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter filing; selected Q4 results are noted below. Unless specified, results are from continuing operations.
Business context
Groupon operates online local-commerce marketplaces connecting consumers with merchants through Local, Goods and Travel offers. It reports North America and International segments. In 2017, the company completed its exit from 11 non-core countries, reducing its footprint to 15 core countries, and shifted emphasis toward Local offers and higher gross profit rather than revenue growth. More than 69% of Q4 transactions were completed on mobile devices.
Financial and operating performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Gross billings | $5.646 billion | $5.688 billion | Down 0.7% |
| Revenue | $2.844 billion | $3.014 billion | Down 5.6% |
| Gross profit | $1.334 billion | $1.281 billion | Up 4.2% |
| Income (loss) from operations | $29.4 million | $(100.2) million | Improved $129.7 million |
| Income (loss) from continuing operations | $28.6 million | $(166.2) million | Improved |
| Net income (loss) attributable to Groupon | $14.0 million | $(194.6) million | Turned profitable |
| Adjusted EBITDA (non-GAAP) | $249.9 million | $179.9 million | Up |
| Operating cash flow, continuing operations | $137.5 million | $128.9 million | Up |
| Free cash flow (non-GAAP) | $78.3 million | $60.6 million | Up |
- Gross margin, calculated as gross profit divided by revenue, was approximately 46.9%, versus 42.5% in 2016. Operating margin was approximately 1.0%, versus approximately negative 3.3%.
- Revenue declined mainly because North American direct Goods revenue fell 23.5%, reflecting the shift in mix away from Goods. North America revenue fell 11.0%; International revenue rose 7.9%.
- North America gross profit increased 4.8% to $927.7 million; International gross profit increased 2.8% to $406.2 million. Direct Goods gross margin in North America improved to 14.7% from 11.8%.
- Active customers increased to 49.5 million from 47.9 million. Gross billings per average active customer declined to $115.91 from $124.26, and gross profit per average active customer declined to $27.38 from $27.98. Units fell to 188.9 million from 195.6 million.
- Marketing expense increased 13.8% to $400.9 million. SG&A fell 9.3% to $901.8 million, chiefly due to restructuring and lower compensation and facilities costs.
- Q4 2017 revenue was $873.2 million, operating income was $49.7 million, and income from continuing operations was $51.1 million. Q4 2016 revenue was $904.9 million, operating income was $9.5 million, and continuing-operations loss was $39.5 million. Q4 generated 30.7% of 2017 revenue.
Liquidity, debt and capital
- Cash and cash equivalents were $880.1 million at year-end, including $321.9 million held by international subsidiaries. Current assets were $1.072 billion and current liabilities $1.133 billion, resulting in a $61.1 million working-capital deficit.
- Groupon had $250.0 million principal amount of 3.25% convertible senior notes due April 2022; their net carrying amount was $189.8 million. The company reported $20.7 million of interest expense and debt-discount amortization in 2017.
- The $250.0 million revolving credit facility had no borrowings outstanding; $22.7 million of letters of credit were outstanding. The company reported compliance with covenants and stated that available liquidity should cover working capital and capital needs for at least 12 months.
- Capital lease obligations were $44.5 million. The company repurchased $60.0 million of shares in 2017; $135.2 million remained available under the program at year-end. No program repurchases occurred in Q4.
Outlook, commentary and material risks
- Management expected marketing spending to increase in 2018 and aimed to maintain an approximately 12–18 month payback period on global marketing investments. It also planned to invest in customer experience, mobile, merchant inventory and international growth. The filing provides no specific revenue or earnings guidance.
- Groupon+ and other voucherless offers may support purchase frequency over time, but are still being developed and scaled. Management warned that they could initially weigh on cash flow and reduce reported gross billings as they grow.
- The company received foreign tax assessments and a notice of potential assessment totaling $138.1 million, primarily relating to transfer pricing for 2011–2014. Management disputes the assessments and plans to defend its position.
- Key risks include customer and merchant retention, paid-marketing efficiency, competition, foreign exchange and international execution, cybersecurity and service interruptions, refund and unredeemed-voucher estimates, inventory and fulfillment exposure, and evolving privacy and consumer regulations. GDPR was due to take effect in May 2018.
- IBM patent litigation was ongoing, with trial in one action scheduled for July 2018. Groupon also disclosed other intellectual-property, consumer, privacy and employment matters, and indemnification obligations associated with divestitures.
- Adoption of the new revenue standard in 2018 was expected to change timing and classification of some revenue and expenses. The company estimated an $85–$90 million after-tax favorable adjustment to accumulated deficit at adoption; certain classification changes would have reduced 2017 revenue by approximately $36.8 million if applied then.
- Unusual items included a $17.1 million gain on the sale of food-delivery intangible assets, $18.8 million of restructuring charges, and $7.6 million of gain on an investment sale. Other income also included $18.6 million of foreign-currency gains, partly offset by interest expense and a $2.9 million investment impairment.
Most important facts for investors to verify
- Whether Local growth and improved Goods margins can sustain gross-profit gains despite lower revenue, billings per customer and units.
- Whether higher marketing expense produces customer retention, repeat purchasing and returns within management’s targeted payback period.
- The outcome and potential cash or earnings impact of the $138.1 million foreign tax assessments, other tax audits, and unredeemed-voucher or unclaimed-property exposure.
- How the 2018 revenue-standard transition affects reported revenue, earnings, liabilities and comparability with 2017.
- Liquidity and covenant headroom as merchant payment terms change and voucherless transactions scale; also review the convertible notes’ dilution and repayment terms.
- Progress on Groupon+ adoption, merchant participation, international profitability, and the disclosed litigation and indemnification matters.