Groupon, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 30, 2019; comparisons are with Q2 2018. Six-month figures are for the six months ended June 30. Dollar amounts are in millions unless stated otherwise. Groupon operates online local-commerce marketplaces in 15 countries through North America and International segments.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $532.6 | $617.4 | $1,111.0 | $1,243.9 |
| Gross profit | $292.1 | $323.7 | $598.1 | $648.5 |
| Gross margin | 54.9% | 52.4% | 53.8% | 52.1% |
| Operating income (loss) | $(7.1) | $(64.2) | $(4.9) | $(60.9) |
| Net loss attributable to Groupon | $(40.2) | $(95.0) | $(82.7) | $(101.9) |
| Adjusted EBITDA | $46.5 | $56.2 | $93.5 | $108.8 |
| Free cash flow | $(17.9) | $26.8 | $(182.9) | $(113.1) |
Q2 service revenue was $277.6 million and product revenue was $255.0 million. Revenue declined 13.7% year over year; gross profit declined 9.7%. The reported operating loss improved substantially, largely because Q2 2018 included a $75.0 million charge related to IBM patent litigation. Adjusted EBITDA declined despite that improvement in reported operating results. Q2 diluted loss per share was $0.07, compared with $0.17 a year earlier; six-month diluted loss per share was $0.14 versus $0.18.
Segments and operating trends
- Q2 North America revenue fell 14.6% to $324.7 million, and gross profit declined 9.5% to $198.6 million. Segment operating loss was $0.4 million, versus a $68.5 million loss in Q2 2018.
- Q2 International revenue fell 12.3% to $207.9 million, and gross profit declined 10.3% to $93.5 million. Segment operating loss was $6.8 million, versus operating income of $4.3 million a year earlier.
- Gross billings declined 11.3% in Q2 to $1,120.9 million; units sold fell 12.0% to 35.3 million. Trailing-twelve-month active customers decreased to 46.2 million from 49.3 million, and gross billings per active customer fell to $107.03 from $111.16. Gross profit per active customer edged up to $27.51 from $27.27.
- Management attributed volume weakness to fewer customers, lower traffic—especially from email and search-engine optimization—and redirecting impressions toward strategic initiatives. International results were also affected by foreign exchange, weak European consumer sentiment, particularly in the U.K., and competition in home and garden.
Cash, debt, and liquidity
- Cash and cash equivalents were $596.8 million at June 30, 2019, down from $841.0 million at December 31, 2018. Total current assets were $762.6 million and current liabilities were $749.7 million.
- Six-month operating cash use was $148.7 million, compared with $75.6 million in the prior-year period. Management cited a $244.2 million working-capital and other-assets/liabilities use, primarily seasonal timing of inventory-supplier payments and, to a lesser extent, lower gross billings. Capital expenditure on property, equipment and capitalized software was $34.2 million.
- Convertible notes had $250.0 million principal and a $208.1 million net carrying amount; they bear 3.25% interest and mature April 2022. No revolving-credit borrowings were outstanding. The new $400 million secured revolver matures May 2024; $18.2 million of letters of credit were outstanding.
- The credit agreement requires at least $250 million of unrestricted cash, including $125 million held with lenders or affiliates, alongside financial covenants. Groupon said it was in compliance at quarter-end. Management believed cash and operating cash generation would meet working-capital and capital-expenditure needs for at least the next 12 months.
- Operating lease obligations were $153.4 million, with finance lease obligations of $20.6 million. Adoption of the new lease standard on January 1, 2019 added $109.6 million of lease assets and liabilities at adoption; prior periods were not restated.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided. Management expected North American active-customer declines to continue in 2019 and, to some extent, into 2020; it also expected unit declines to continue in 2019.
- Management is testing or developing card-linked cash-back offers, booking capabilities, and the Groupon Select paid membership program. It cautioned that investment in these initiatives could pressure near-term gross profit and operating income. Card-linked offers may also be less favorable to working capital than voucher sales.
- A $69.0 million six-month loss on fair-value investments, principally the Monster LP investment, contributed to other expense. Groupon reduced Monster LP’s fair value to zero after revising forecasts amid continued underperformance and business-model changes. The investment loss is valuation-sensitive and non-cash in the period.
- Groupon disclosed a proposed foreign tax assessment of $109.9 million, primarily concerning transfer pricing for 2011 transactions. The company disputes the assessment and intends to defend itself. It also reported $3.2 million of remaining indemnification liabilities from its Latin America disposition and approximately $13.3 million of reasonably possible additional exposure under those indemnifications.
- Risks include declining customer traffic and transaction volumes, merchant retention and competition, foreign-exchange movements, execution of growth initiatives, refund and fulfillment exposure, cybersecurity and technology dependencies, litigation and regulatory matters, tax assessments, and debt and covenant requirements. The filing said there were no material changes to previously disclosed risk factors.
- On July 29, 2019, director Joey Levin resigned; the company stated the departure was not due to a disagreement. Disclosure controls were deemed effective at June 30, 2019.
Investor verification priorities
- Track whether customer, traffic, and unit declines continue, and whether strategic initiatives improve repeat purchases and gross profit per customer.
- Assess the sustainability of adjusted EBITDA and cash generation, including seasonal supplier-payment timing and the working-capital effects of card-linked offers.
- Review the basis and sensitivity of the Monster LP valuation and its impact on reported earnings and investment balances.
- Monitor cash against the revolver’s minimum-liquidity and other covenant requirements, as well as the 2022 notes maturity and lease commitments.
- Follow developments in the $109.9 million tax assessment, legal proceedings, and other contingencies; the filing does not specify a clear ultimate outcome or timing.
- Evaluate share repurchases against liquidity needs: Groupon repurchased 8.6 million shares for $30.1 million in the first half, with $260.0 million remaining under the authorization at June 30.