Groupon, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Figures below are unaudited. Groupon operates a local-commerce marketplace, reporting North America and International segments. Third-party deal revenue is generally reported net of merchant payments; direct revenue from products Groupon sells as merchant of record is reported gross.
Financial performance and liquidity
| Metric | Q2 2012 | Six months 2012 | Comparable 2011 |
|---|---|---|---|
| Revenue | $568.3m | $1,127.6m | Q2 $392.6m; six months $688.1m |
| Operating income (loss), GAAP | $46.5m | $86.1m | Q2 $(101.0)m; six months $(218.2)m |
| Net income (loss) | $33.5m | $30.0m | Q2 $(109.8)m; six months $(223.7)m |
| Net income attributable to Groupon | $32.3m | $27.9m | Q2 $(101.2)m; six months $(203.9)m |
| EPS, basic and diluted | $0.04 | $0.03 | Q2 $(0.35); six months $(0.83) |
| Operating cash flow | Not stated separately | $159.0m | $57.0m |
| Free cash flow, company-defined | Not stated separately | $119.2m | $35.8m |
Revenue rose 44.8% year over year in Q2 and 63.9% for the first half. Q2 operating margin was approximately 8.2%; net margin was approximately 5.9%. First-half operating margin was approximately 7.6%; net margin was approximately 2.7%. These margins use reported consolidated revenue, which includes both net agency revenue and gross direct revenue.
Gross billings were $1,286.7m in Q2, up 38.5%, and $2,641.5m for the first half, up 65.4%. For the trailing twelve months ended June 30, active customers increased to 38.0m from 23.0m; gross billings per average active customer declined to $164.68 from $173.59, and revenue per average active customer declined to $67.12 from $74.10.
- Revenue mix and segments: Q2 third-party revenue was $496.7m and direct revenue was $65.4m; first-half amounts were $1,031.9m and $84.6m, respectively. First-half North America revenue was $498.7m and International revenue $628.9m; International represented 55.8% of revenue.
- Cash and liquidity: Cash and cash equivalents were $1,185.8m at June 30, versus $1,122.9m at December 31, 2011. Current assets were $1,400.6m and current liabilities $1,100.2m, a current ratio of approximately 1.27. Accrued merchant payables were $543.8m.
- Debt: The filing states Groupon had no long-term borrowings. No material debt balance is reported in the supplied balance sheet.
- Non-GAAP segment result: Consolidated segment operating income, excluding stock compensation and acquisition-related items, was $71.9m for Q2 and $139.5m for the first half, compared with losses of $62.3m and $160.6m in 2011.
Material changes versus prior periods
- Both segments moved from operating losses to operating income. Management attributed improvement mainly to revenue growth and lower marketing spending as it shifted from customer acquisition to customer activation and benefited from earlier investments.
- Marketing expense fell to $88.4m in Q2 from $212.7m, and to $205.0m for the first half from $442.8m. SG&A increased to $299.9m in Q2 from $226.1m and to $583.5m for the first half from $368.9m, reflecting staffing, technology, and infrastructure investment.
- Cost of revenue increased to $135.2m in Q2 from $54.8m and to $254.7m in the first half from $94.6m, partly due to Groupon Goods product costs, higher transaction volumes, and refunds not recoverable from merchants.
- First-half interest and other income included a $56.0m pre-tax gain from exchanging Groupon’s E-Commerce King interest for a 19% interest in Life Media (F-tuan) and cash consideration. The gain was non-operating; the investment was carried at $128.1m at June 30.
- First-half income tax expense was $101.4m on pre-tax income of $131.4m, a 77.2% effective rate; Q2 tax expense was $66.9m on pre-tax income of $100.4m. The rate reflected the transaction gain, losses for which no benefit was recognized, and amortization of taxes related to a 2011 intellectual-property sale.
- The 2011 comparative expense presentation was restated to reclassify certain technology, editorial, and marketing staff costs. The filing says this presentation change did not affect pre-tax loss, net loss, or per-share amounts.
Outlook, commentary, and risks
- No numerical revenue or earnings guidance is provided. Management expected direct revenue from Groupon Goods to continue growing significantly during 2012, expected International to remain the majority of revenue, and planned continued investment in technology, sales capacity, facilities, acquisitions, and customer activation.
- Management expected operating cash flow to remain positive and believed available cash and operating cash generation would cover working capital and capital expenditures for the next twelve months, while cautioning that it could not provide assurance. Merchant payment terms had become more favorable and accelerated, reducing the cash-flow contribution from merchant payables; changes in these terms can make working capital and cash flow volatile.
- Refund estimates are a significant judgment. Groupon revised its refund model after late-2011 refund activity diverged from modeled behavior, in part because of deal-mix changes and higher-priced offers. Higher-than-estimated refunds could materially affect liquidity and profitability.
- Disclosure controls were deemed ineffective because of a material weakness in the financial-statement close process, account reconciliations, and review of estimates, including refund reserves. Remediation was underway, but management could not assure effectiveness by year-end 2012.
- Material risks include securities and derivative litigation following the March 2012 revision of 2011 results; customer and merchant claims concerning gift-card, coupon, and stored-value laws; intellectual-property disputes; regulatory, tax, privacy, and foreign-exchange exposure; competitive pressure; and execution risks in international expansion and Groupon Goods.
- Five federal securities class actions were consolidated, and derivative suits were pending or stayed as described in the filing. A German contract suit alleged approximately $2.8m in unpaid obligations; Groupon said it believed it had defenses and did not expect a material effect. Management stated it did not then expect the disclosed legal matters, based on available information, to materially adversely affect the company, but litigation could still impose costs and divert management resources.
Most important facts for investors to verify
- Whether the operating improvement is sustainable without relying on reduced acquisition marketing, and how customer activity and spend per customer develop.
- The quality and durability of operating cash flow, particularly the effect of merchant payment terms, refunds, and working-capital movements.
- Whether Groupon Goods growth produces acceptable economics after product, fulfillment, refund, and inventory costs.
- How much reported earnings depended on the $56.0m transaction gain and the unusually high tax provision; first-half net income was $30.0m.
- Progress in remediating the material weakness and the results of the planned year-end 2012 internal-control assessment.
- Changes in refund reserves, gift-card and unclaimed-property exposure, litigation, and contingent obligations. The filing reports $54.3m of unrecognized tax benefits for which settlement timing could not be reasonably estimated.