Groupon, Inc. — Q2 2013 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2013, compared with the same 2012 periods. Groupon operates a local-commerce marketplace across North America, EMEA and Rest of World, offering Local, Goods and Travel deals. It reports third-party marketplace revenue net of the merchant’s share, but records direct sales—mainly Goods where Groupon is merchant of record—gross.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $608.7 million | $568.3 million | $1,210.1 million | $1,127.6 million |
| Gross profit | $384.7 million | $433.2 million | $763.7 million | $872.9 million |
| Income from operations | $27.4 million | $46.5 million | $48.6 million | $86.1 million |
| Net income (loss) | $(5.6) million | $33.5 million | $(8.8) million | $30.0 million |
| Operating income excluding stock compensation and acquisition-related benefit (non-GAAP) | $59.0 million | $71.9 million | $110.2 million | $139.5 million |
Revenue grew 7.1% in Q2 and 7.3% in the first half. Gross margin fell to 63.2% from 76.2% in Q2 and to 63.1% from 77.4% for the half, principally reflecting the greater share of lower-margin direct Goods revenue. Operating margins were 4.5% and 4.0%, respectively, versus 8.2% and 7.6% in the comparable periods. Q2 diluted loss per share was $0.01; first-half diluted loss per share was $0.02.
Gross billings were $1,413.8 million in Q2, up 9.9%, and $2,821.6 million for the half, up 6.8%. Active customers reached 42.6 million for the trailing twelve months, versus 38.0 million; billings per average active customer declined to $137.84 from $164.68. Units sold rose to 46.4 million in Q2 from 40.2 million.
For the six months, operating cash flow was $52.1 million, down from $159.0 million; free cash flow, a non-GAAP measure, was $23.6 million versus $119.2 million. Cash and cash equivalents were $1,182.0 million at June 30, down from $1,209.3 million at year-end. Current assets were $1,437.0 million and current liabilities $1,064.9 million. Total liabilities were $1,186.2 million; the filing reports no material conventional borrowings and $4.6 million of long-term capital lease obligations. Accrued merchant and supplier payables were $616.6 million.
Material changes versus prior periods
- Q2 direct revenue increased $124.5 million to $189.9 million; first-half direct revenue rose $267.6 million to $352.2 million. Third-party revenue fell $81.6 million in Q2 and $179.7 million for the half, partly as Groupon retained a smaller share of billings on deals.
- Goods drove much of the billings and direct-revenue increase, especially in North America. The company said direct revenue growth generally adds less operating income than equivalent third-party revenue growth because it includes product costs, shipping and fulfillment.
- Gross profit fell despite higher revenue, as direct cost of revenue rose to $168.5 million in Q2 and $320.9 million for the half. Direct-deal gross margins were 11.2% in Q2 and 8.9% for the half.
- Marketing expense declined to $55.5 million in Q2 from $88.4 million and to $105.1 million for the half from $205.0 million. SG&A rose to $302.6 million in Q2 and $610.8 million for the half.
- North America segment revenue increased, while EMEA and Rest of World revenue declined. Rest of World reported segment operating losses, excluding stock compensation and acquisition-related benefits, of $14.2 million in Q2 and $38.6 million for the half.
- Operating cash flow was pressured by a $38.0 million reduction in accrued merchant and supplier payables, primarily reflecting payments for late-2012 Goods transactions. The prior-year period benefited from growth in merchant payables.
Outlook, management commentary, risks and unusual items
- The filing provides no numeric revenue or earnings guidance. Management expected direct Goods revenue to continue growing, including internationally, and anticipated higher marketing spending in future periods to grow the active customer base. It also expected near-term fulfillment costs could rise while transitioning some U.S. fulfillment work in-house.
- Management said cash and expected operating cash generation should cover working capital and capital expenditures for at least the next 12 months, while noting seasonal working-capital swings and the cash-flow sensitivity to merchant payment terms. The company expects positive operating cash flow in the foreseeable future.
- In August 2013, after quarter-end, the board authorized repurchases of up to $300 million of Class A shares over 24 months, funded from cash and future cash flow. The program may be suspended or discontinued; no dividends are expected in the foreseeable future.
- The company recorded a 125.4% effective tax rate in Q2 and 123.2% for the half. Management cited losses in jurisdictions where tax benefits were unavailable, amortization of tax effects on intercompany transactions and nondeductible stock compensation. It expects its effective tax rate to remain materially different from the U.S. statutory rate.
- The F-tuan investment’s estimated fair value was $69.1 million, below its $77.5 million carrying amount. Groupon did not recognize a new impairment at June 30, 2013, but warned that weaker investee performance or lower-value financing could require a future charge. EMEA reporting units Western EMEA and Eastern/Central EMEA had liabilities exceeding assets; management concluded goodwill was not impaired following qualitative evaluation.
- Q2 2012 results included a $56.0 million gain on the E-Commerce transaction, making the year-over-year comparison of other income and net income less representative of underlying operations.
- Pending matters include securities and shareholder derivative litigation concerning prior financial reporting and disclosures, consumer and gift-card/coupon class actions, intellectual-property disputes and regulatory matters. The company said it could not estimate reasonably possible losses beyond amounts accrued; outcomes could entail costs, damages or changes to business practices.
- Risks include intense competition and pressure on deal margins, customer and merchant retention, international-market weakness and currency movements, Goods inventory and fulfillment execution, refunds, payment and privacy regulation, litigation, and cybersecurity. The filing disclosed a May 2013 unauthorized access to a database of Taiwan subscribers containing usernames and passwords.
- Management reported disclosure controls effective as of June 30, 2013 and no material change in internal control during the quarter. The filing also recounts a material weakness in the 2011 financial-reporting close process and related restatement; related shareholder litigation remained pending.
Important facts for investors to verify
- Whether growth in direct Goods sales can produce sustainable profit and cash flow despite lower margins and fulfillment costs.
- Whether third-party deal margins and revenue in EMEA and Rest of World stabilize, and whether Rest of World operating losses narrow.
- Whether reduced operating cash flow reflects mainly timing and seasonality or a more persistent change in merchant payment terms and working-capital needs.
- The assumptions and future impairment risk underlying the F-tuan valuation, and the status of goodwill in EMEA reporting units with negative book values.
- Developments in litigation, coupon and unclaimed-property regulation, tax audits, and the disclosed subscriber-data incident.
- Execution and funding of the $300 million repurchase authorization alongside planned investment, acquisitions and liquidity needs.