Groupon, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Groupon operates a local commerce marketplace, reported in North America and International segments. Unless stated otherwise, amounts below are in U.S. dollars.
Financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $601.4 million | $559.3 million |
| Gross profit | $379.0 million | $439.8 million |
| Gross margin | 63.0% | 78.6% |
| Operating income | $21.2 million | $39.6 million |
| Net loss attributable to Groupon | $4.0 million | $4.5 million |
| Operating cash flow | $8.8 million | $83.7 million |
| Free cash flow (non-GAAP) | $(5.7) million | $70.6 million |
- Gross billings increased 3.9% to $1.408 billion. Revenue rose 7.5%, but its composition shifted sharply: direct revenue, primarily from Groupon Goods, increased $143.1 million to $162.3 million; third-party revenue declined $98.0 million to $437.2 million.
- Goods revenue is generally reported gross when Groupon acts as merchant of record; this mix shift lifted reported revenue while contributing to lower gross margin. Direct-deal gross profit was $9.9 million, or 6.1% of direct revenue, versus $2.4 million, or 12.3%, a year earlier.
- Marketing expense fell $67.1 million to $49.6 million. SG&A rose $24.6 million to $308.2 million, reflecting technology, infrastructure, staffing and related costs. Operating income excluding stock compensation and acquisition-related expense, a company-defined non-GAAP measure, declined to $51.2 million from $67.6 million.
- North America revenue grew to $339.6 million from $238.6 million; International revenue fell to $261.8 million from $320.7 million. Segment operating income, excluding stock compensation and acquisition-related expense, was $41.4 million in North America and $9.8 million International, versus $40.2 million and $27.4 million, respectively.
Liquidity, cash flow and debt
- Cash and cash equivalents were $1.166 billion at March 31, 2013, down $43.6 million from year-end 2012. Current assets were $1.431 billion and current liabilities $1.101 billion.
- Operating cash flow fell by $75.0 million year over year, principally because merchant and supplier payables decreased $39.4 million in Q1 2013, compared with a $46.0 million increase in Q1 2012. The company attributed the decrease largely to payments for merchandise sold during the seasonally strong late-2012 Goods period.
- Investing cash outflow was $30.7 million, including $14.5 million of capital expenditures and capitalized software and $13.1 million of investment purchases. Financing cash outflow was $9.3 million. Foreign exchange reduced cash by $12.4 million.
- The filing reports no significant long-term borrowings, but does report $4.8 million of long-term capital lease obligations. Accrued merchant and supplier payables were $620.5 million. Management said available cash and expected operating cash flows should cover working capital and capital needs for the next 12 months.
Material changes, outlook and risks
- Management attributed growth in North America partly to Goods and more active customers, while International billings and revenue weakened, particularly in Local and Travel. Active customers for the trailing 12 months rose to 41.7 million from 36.9 million, but billings per average active customer declined to $138.32 from $178.92.
- Management expected direct revenue to continue growing and anticipated increased marketing spending in both segments, alongside continued investment in technology, merchant products, facilities and strategic acquisitions. It also expected operating cash flow to remain positive; the filing provides no specific revenue or earnings guidance.
- The company reported an accumulated deficit of $757.5 million and a 120.1% effective tax rate, driven in part by losses in jurisdictions where tax benefits were not recognized, intercompany intellectual-property tax amortization and nondeductible stock compensation.
- F-tuan, a cost-method investment, had a measured fair value of $71.6 million versus its $77.5 million carrying value. Groupon did not record a new impairment, but warned that weaker investee performance or financing at a materially lower valuation could require an impairment charge.
- Material risks include competition, customer and merchant retention, international execution and foreign exchange, Goods inventory and fulfillment, refund estimates, payment and regulatory exposure, and litigation. Pending matters include securities and derivative suits, intellectual-property disputes, and consumer claims concerning gift-card and coupon laws. A previously approved $8.5 million marketing-practices settlement remained subject to appeal and was not effective while the appeal was pending. The company said it could not estimate reasonably possible losses beyond recorded accruals for the described legal and regulatory matters.
- The former CEO was terminated on February 28, 2013; a two-member Office of the Chief Executive was serving in that role pending a permanent replacement. Management concluded disclosure controls were effective as of quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Goods revenue growth can generate durable gross profit and cash flow, given its lower margins and inventory exposure.
- Whether International performance stabilizes and whether customer engagement improves as per-customer billings decline.
- Whether operating cash flow recovers after seasonal supplier payments and any further changes to merchant payment terms.
- Developments in the F-tuan investment valuation, tax assessments and valuation allowances, and the listed litigation and regulatory matters.
- Progress in hiring a permanent CEO and executing planned technology, marketing and marketplace investments.