Groupon, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Unless noted, amounts below are in U.S. dollars. Comparative operating results are generally for continuing operations, with Ticket Monster presented as discontinued operations.
Business context and reporting period
Groupon operates online local-commerce marketplaces connecting consumers and merchants, with Local, Goods and Travel offerings. Operations are reported in North America, EMEA and Rest of World. In May 2015, Groupon sold a controlling stake in Ticket Monster, deconsolidated the business and classified its results and disposal gain as discontinued operations.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $738.4M | $716.2M | $1,488.8M | $1,444.6M |
| Gross profit | $337.0M | $366.4M | $684.4M | $731.9M |
| Operating income (loss) | $(9.2)M | $2.4M | $(3.9)M | $(4.0)M |
| Continuing-operations net loss | $(15.3)M | $(10.7)M | $(32.0)M | $(32.5)M |
| Net income (loss), including discontinued operations | $111.9M | $(20.9)M | $101.5M | $(56.3)M |
| Adjusted EBITDA (non-GAAP) | $61.1M | $59.7M | $133.5M | $105.5M |
| Free cash flow (non-GAAP) | $(12.5)M | $(57.2)M | $10.0M | $(87.9)M |
Q2 revenue rose 3.1%, but gross profit fell 8.0%; gross margin declined to 45.6% from 51.2%. For the first half, revenue increased 3.1% and gross margin declined to 46.0% from 50.7%. Net income was driven by the Ticket Monster disposal gain, not profitable continuing operations. Q2 diluted EPS was $0.16, including $0.19 from discontinued operations and a $0.03 continuing-operations loss.
Direct revenue, largely Groupon Goods, increased 15.7% in Q2 to $397.5M and accounted for 53.8% of revenue. Its gross margin was 11.0%, down from 12.4%; the larger, lower-margin direct-sales mix weighed on consolidated margin. Third-party revenue declined to $328.5M from $366.7M, including lower merchant-retention rates. Segment operating income (excluding stock compensation and acquisition expense) increased in North America to $26.9M, declined in EMEA to $9.7M, and Rest of World reported a $6.8M loss.
Cash and cash equivalents were $1,110.1M at June 30, 2015, versus $1,016.6M at year-end 2014. First-half operating cash flow from continuing operations was $50.7M, compared with use of $43.1M a year earlier; working-capital changes included a $50.5M decline in accrued merchant and supplier payables. Cash flow from investing activities included $244.5M of net cash proceeds related to discontinued operations, principally the Ticket Monster transaction. The company reported no borrowings under its $250M revolving credit facility and said it was covenant-compliant. Capital lease obligations totaled about $33.0M. Current assets were $1,397.4M and current liabilities $1,089.0M.
Material changes versus the prior comparable period
- Q2 gross billings increased 1.8% to $1,529.0M; direct gross billings rose while third-party gross billings declined. The company reported 48.6M trailing-twelve-month active customers, up from 45.9M, while billings per average active customer eased to $133.12 from $135.86.
- North America revenue grew to $481.3M, while EMEA revenue declined to $204.0M and Rest of World revenue to $53.1M. Reported international performance was affected by currency movements; Q2 foreign exchange reduced revenue by $54.2M and gross profit by $28.3M, according to management.
- Q2 selling, general and administrative expense declined 5.6% to $288.7M, while stock-based compensation increased to $38.5M from $29.7M. The six-month operating cash-flow improvement and positive free cash flow contrasted with the prior-year periods.
- Groupon repurchased 21.8M shares for $141.2M in the first half. A new $500M repurchase authorization runs through August 2017; $461.0M remained available at quarter-end.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no specific revenue or earnings guidance. Management expected positive annual operating cash flow for the foreseeable future and believed available cash and operating cash generation should cover working capital and capital expenditures for at least 12 months. It also anticipated continued investment in technology, marketplaces, sales and marketing.
- Strategy and margins: Management said it may accept lower merchant margins to attract merchants and improve deal selection. Goods growth increases reported revenue but contributes less income and cash flow per revenue dollar than third-party transactions. The company cited ongoing efforts to reduce shipping and fulfillment costs and improve operational efficiency.
- Cost actions: Groupon was reviewing cost-reduction opportunities, particularly internationally, and said resulting actions could create significant costs in the second half of 2015. It was also exploring financing and strategic alternatives for certain other international markets, without assurance of a transaction.
- Ticket Monster disposal: The May sale generated $285.0M cash consideration and a retained minority investment valued at $122.1M; after $8.3M transaction costs, Groupon recorded a $202.2M pretax gain ($138.0M after tax). The transaction materially inflated reported net income. The retained investment is measured at fair value using significant unobservable inputs.
- Subsequent events: Groupon acquired OrderUp on July 16 for about $69M cash plus up to $20M contingent consideration. On August 6, an investor obtained majority voting control of Groupon India; Groupon received no proceeds and expected a pretax remeasurement gain of $13M–$17M, subject to valuation. A new headquarters lease increased future lease payments by a net $92.3M.
- Contingencies and risks: Foreign tax authorities assessed $43.4M of additional VAT, including interest and penalties; Groupon disputes the assessments. Securities and shareholder-derivative litigation remains pending, and the company could not reasonably estimate possible losses above accruals for those matters. A proposed $8.5M settlement of a separate marketing-practices class action was being renegotiated after an earlier settlement was vacated. Other disclosed risks include foreign exchange, competition, customer and merchant retention, refunds, cybersecurity, regulation, and tax audits; up to $19.3M in unrecognized tax benefits could change within 12 months.
Important facts for investors to verify
- Whether continuing-operations profitability and cash generation improve without relying on asset disposals, non-GAAP adjustments or favorable working-capital timing.
- Whether direct Goods growth can sustain or improve its thin margins, and whether third-party revenue and merchant-retention rates stabilize.
- The impact of foreign exchange and international-market performance, especially in EMEA and Rest of World.
- The assumptions and valuation sensitivity of the retained Ticket Monster investment, and the final accounting for the OrderUp acquisition and Groupon India deconsolidation.
- Cash uses from share repurchases, acquisitions and the expanded headquarters lease, alongside the outcome of VAT assessments, tax audits and litigation.