Groupon, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; Q4 figures below are unaudited quarterly data. Amounts are in U.S. dollars.
Business context and reporting period
Groupon operates online marketplaces connecting consumers with merchants, primarily through Local, Goods and Travel offerings. It reports North America, EMEA and Rest of World segments. In 2016, Groupon narrowed its footprint from 47 countries at the end of 2014 to 24, and announced plans to focus on 15 core countries while pursuing alternatives for 11 others. LivingSocial was acquired on October 31, 2016 for no consideration; its results contributed about 1.0 million incremental active customers at year-end.
Financial and operating metrics
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Gross billings | $6,096.5 million | $6,255.5 million | -2.5% |
| Revenue | $3,143.4 million | $3,119.5 million | +0.8% |
| Gross profit | $1,356.9 million | $1,385.1 million | -2.0% |
| Gross margin | 43.2% | 44.4% | -1.2 percentage points |
| Operating loss | $(109.8) million | $(79.8) million | Loss widened |
| Loss from continuing operations | $(183.3) million | $(89.2) million | Loss widened |
| Net income (loss) attributable to Groupon | $(194.6) million | $20.7 million | Turned to loss |
| Adjusted EBITDA (non-GAAP) | $178.1 million | $256.8 million | -30.7% |
| Operating cash flow, continuing operations | $117.1 million | $299.7 million | Down $182.6 million |
| Free cash flow (non-GAAP) | $48.2 million | $215.8 million | Down $167.5 million |
FY 2015 net income included $122.9 million of income from discontinued operations, principally the Ticket Monster disposition; it is therefore not directly comparable with 2016 net loss. Active customers increased to 52.7 million from 48.9 million, including approximately 1.0 million from LivingSocial, while gross billings per average active customer fell to $119.97 from $129.98. Units sold declined to 214.3 million from 220.8 million.
Fourth quarter: Revenue was $934.9 million versus $917.2 million in Q4 2015; gross profit was $369.9 million versus $371.7 million. Operating income was $7.4 million versus an operating loss of $5.4 million, but loss from continuing operations was $50.2 million versus $32.6 million. Net loss attributable to Groupon was $52.6 million versus $46.5 million.
Liquidity and debt: Year-end cash and cash equivalents were $891.8 million, compared with $853.4 million. Current assets of $1,091.9 million were below current liabilities of $1,213.1 million, resulting in a $121.1 million working-capital deficit. Groupon issued $250 million of 3.25% convertible notes due 2022; their year-end net carrying amount was $179.0 million. The $250 million revolving credit facility, maturing in 2019, had no borrowings outstanding; the company reported covenant compliance. Capital lease obligations had a $48.6 million present value. Management expected available cash and operating cash flows to cover requirements for at least 12 months and expected positive operating cash flow in 2017.
Material changes versus the prior comparable period
- Gross billings fell primarily from international country exits and dispositions ($180.8 million reduction) and unfavorable currency effects ($75.9 million). North America gross billings rose 6.1%, while EMEA fell 11.5% and Rest of World fell 23.9%.
- Revenue was nearly flat as higher direct Goods and other revenue offset lower third-party revenue. Direct revenue increased 5.3%; third-party revenue declined 7.7%.
- Gross profit declined despite improved North America Goods direct margins, which rose to 11.8% from 10.2%. Management attributed the improvement to emphasizing higher-margin products and reducing shipping and fulfillment costs.
- Marketing expense rose 42.7% to $363.0 million, reflecting increased customer-acquisition spending. SG&A fell 10.6% to $1,066.2 million, mainly from workforce reductions, country exits and the absence of a prior-year securities-litigation expense.
- Operating loss widened as increased marketing, lower gross profit and higher restructuring charges more than offset lower SG&A. Other expense increased to $76.1 million, including $48.1 million of fair-value investment losses and $15.7 million of interest expense.
- Cash flow from continuing operations and free cash flow fell sharply year over year. The company repurchased $162.4 million of shares during 2016; approximately $195.0 million remained under its authorization at year-end.
Outlook, management commentary and risks
- Management said its 2017 priority was to increase overall gross profit, whether through revenue growth or margin improvement. Marketing expense as a percentage of gross billings was expected to remain relatively consistent with 2016, while SG&A was generally expected to decline as restructuring savings took effect.
- The restructuring program was expected to be substantially complete by June 2017. The company reported $43.6 million of restructuring charges in 2016 and $65.5 million of cumulative severance and other exit costs since the plan began, excluding cumulative asset impairments.
- Groupon expected to focus on 15 core countries and anticipated completing, or meeting held-for-sale criteria for, most remaining planned international dispositions by March 31, 2017. It expected to present qualifying businesses as discontinued operations and combine EMEA and Rest of World into one International segment in 2017.
- Management warned that a stronger U.S. dollar, including sterling weakness following the Brexit referendum, could continue to hurt reported international results. Competition, customer acquisition costs, merchant terms, customer retention, refunds, cybersecurity, technology integration, inventory and fulfillment, and regulatory uncertainty remain material risks.
- Groupon recorded $6.4 million of gift-card breakage revenue in 2016 after concluding it could estimate non-redemption from historical data. Estimates of refunds, unredeemed vouchers and tax positions involve judgment and could differ from actual outcomes.
- Fair-value losses on minority investments in Monster Holdings LP and GroupMax totaled $48.1 million in 2016. Their valuations rely on significant unobservable assumptions; Monster LP’s December 2016 financing implied a lower valuation. Groupon also disclosed pending intellectual-property and other litigation, including IBM patent claims, while stating that reasonably possible losses above accrued amounts were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether customer growth and materially higher marketing spend produce sustained repeat purchases and improved gross profit and cash generation.
- Progress and financial effects of the planned international exits, including discontinued-operations presentation and the expected segment reorganization.
- Conversion, settlement and potential dilution terms of the $250 million notes, including the effect of the note hedges and warrants; also monitor revolver covenants and liquidity.
- Whether currency movements, merchant margin concessions, refunds and gift-card or unclaimed-property rules materially affect revenue, cash flows or recorded liabilities.
- Subsequent valuation and financing developments for Monster LP and GroupMax, and material updates to litigation, tax audits and restructuring costs.