Groupon, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Groupon operates a two-sided marketplace in North America and International, across Local, Goods and Travel. Comparisons are against the corresponding 2020 periods, which were heavily affected by COVID-19. Dollar amounts below are in millions unless noted.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $266.0 | $395.6 | $529.8 | $769.8 |
| Gross profit | $193.9 | $137.2 | $360.9 | $338.5 |
| Operating income (loss) | $(2.0) | $(72.1) | $(3.2) | $(270.0) |
| Net income (loss) attributable to Groupon | $(3.4) | $(72.1) | $11.2 | $(285.6) |
| Adjusted EBITDA (non-GAAP) | $41.0 | $1.3 | $71.3 | $(21.1) |
| Free cash flow (non-GAAP) | $(46.8) | $72.8 | $(105.2) | $(174.2) |
- Revenue mix: Q2 service revenue rose 83.4% to $206.2 million, while product revenue fell 78.9% to $59.8 million. For the first half, service revenue increased 18.6% to $378.8 million, but product revenue decreased 66.5% to $151.0 million. The filing attributes much of the product-revenue decline to Groupon’s transition from first-party Goods sales to third-party marketplace transactions, where revenue is generally reported net.
- Gross profit and margins: Gross profit increased 41.3% in Q2 and 6.6% in the first half. Reported revenue and gross-margin comparisons are affected by the Goods model change. Q2 service margin was 37.1% in North America versus 43.1% a year earlier, and 39.5% International versus 24.7%.
- Marketplace activity: Q2 gross billings increased 4.3% to $607.6 million, but units fell 27.6% to 16.7 million and trailing-twelve-month active customers declined 34.4% to 24.9 million. First-half gross billings decreased 16.4% to $1.16 billion.
- Cash, liquidity and debt: Cash and cash equivalents were $565.0 million at June 30, down from $850.6 million at year-end 2020. Current assets were $647.4 million and current liabilities $712.7 million. Debt comprised $100.0 million drawn on the revolving facility and $230.0 million principal of 2026 convertible notes (reported carrying value $222.7 million). The $225.0 million revolver also had $23.5 million of letters of credit outstanding.
- Cash flow: First-half operating cash flow was $(80.8) million and capital expenditures/software purchases were $24.5 million, producing free cash flow of $(105.2) million. Management attributed the gap between net income and operating cash use mainly to a $113.6 million net working-capital and other balance-sheet outflow, including seasonal supplier-payment timing and COVID-19 effects.
Material changes and unusual items
- North America Q2 revenue fell 31.1%, despite 78.4% growth in service revenue, principally because first-party Goods revenue largely shifted to the third-party marketplace presentation. Local demand and gross profit improved; North America contribution profit rose 24.4% to $109.0 million.
- International Q2 revenue declined 35.2%, primarily from lower Goods sales, while gross profit rose 45.6% to $51.7 million. For the first half, International gross profit fell 5.0%, with ongoing COVID-related weakness in Local and Goods partly offset by higher service margin and favorable currency effects.
- First-half net income included a $32.3 million foreign-currency translation gain reclassified to earnings after Groupon substantially liquidated its Japan subsidiary. The six-month results also included a $4.2 million gain on an investment divestiture. Q2 included a $5.1 million loss on early extinguishment of the Atairos convertible notes.
- Groupon issued $230.0 million of 1.125% convertible notes due 2026 and used proceeds, together with cash, to repurchase $250.0 million principal of its 2022 Atairos notes. It also paid $27.4 million for capped-call transactions intended to reduce dilution, subject to a cap.
Outlook, management commentary and risks
- Management expects up to $105 million of total pretax restructuring charges through the end of 2021; $86.5 million had been incurred cumulatively by June 30. The plan includes approximately 1,600 global position reductions and exits from Japan and New Zealand. Once fully implemented, management expects $225 million in annualized cost savings; this is an expectation, not a guarantee.
- Management said cash balances, excluding revolver borrowings, and cash generated from operations should be sufficient for working capital and capital expenditures for at least the next 12 months, while noting there can be no assurance. The company extended covenant relief through Q4 2021. During this period, it must meet specified quarterly EBITDA tests and monthly liquidity requirements tied to accrued merchant and supplier payables.
- Strategy focuses on expanding Local inventory and improving merchant and customer experiences. Groupon began rolling out a new North America customer experience in Q2 and is scaling offers with fewer restrictions, lower-discount Offers, and market-rate inventory. It is also transitioning International Goods to a third-party marketplace model.
- COVID-19 recovery remained uncertain, with management citing potentially prolonged or volatile effects and the spread of variants including Delta; restrictions had been more prolonged and stricter in International markets. Other key risks include declining traffic and reliance on email, search engines and app stores; customer and merchant retention; cybersecurity; foreign-exchange movements; and compliance with debt covenants.
- A foreign tax authority has proposed an assessment of $123.9 million, including estimated interest, primarily concerning 2011 transfer pricing. Groupon considers it without merit and intends to defend it. The filing also describes pending securities, intellectual-property, consumer and other legal matters; management said reasonably possible losses above accruals were not expected to be material, while acknowledging litigation uncertainty.
Important facts for investors to verify
- Whether Local demand, gross billings and customer purchase frequency continue to improve, particularly given declining units and active customers.
- How much of the revenue and margin movement reflects the Goods marketplace transition versus underlying demand, and whether the transition progresses as planned internationally.
- Cash use, working-capital seasonality and compliance with the revolver’s monthly liquidity and quarterly EBITDA requirements during covenant relief.
- Whether the restructuring delivers the projected annualized savings, and the remaining cash costs and timing of the plan.
- Potential outcomes of the $123.9 million tax assessment and other litigation, and the financial effects of COVID-19, foreign exchange and debt obligations.