Groupon, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Groupon operates online local-commerce marketplaces, reported in North America and International segments. Results are unaudited; prior periods were recast for discontinued operations.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $662.6 million | $723.8 million | $1,336.2 million | $1,422.2 million |
| Gross profit | $328.1 million | $315.4 million | $637.5 million | $635.5 million |
| Gross margin | 49.5% | 43.6% | 47.7% | 44.7% |
| Operating loss | $(7.4) million | $(39.8) million | $(19.1) million | $(84.9) million |
| Net loss attributable to Groupon | $(9.3) million | $(54.9) million | $(33.7) million | $(104.0) million |
| Adjusted EBITDA (non-GAAP) | $53.3 million | $35.6 million | $98.1 million | $67.1 million |
| Free cash flow (non-GAAP) | $(36.1) million | $(67.5) million | $(186.4) million | $(162.1) million |
Q2 revenue fell 8.4%, while gross profit rose 4.0% and gross margin improved. The revenue decline mainly reflected lower North American direct Goods sales as Groupon shifted away from lower-margin goods toward Local offerings; third-party revenue increased. Operating results also benefited from lower SG&A and restructuring costs, partly offset by higher marketing expense. International revenue increased 1.9% in Q2, but International gross profit declined 4.1%.
Cash, liquidity and debt
- Cash and cash equivalents were $618.6 million at June 30, down $244.4 million from December 31, 2016. Cash used in operating activities was $159.1 million for the first half, including $156.9 million from continuing operations.
- Free cash flow from continuing operations was negative $186.4 million for the first half. Management attributed operating cash use primarily to working-capital movements, including a $183.0 million decrease in accrued merchant and supplier payables, and the continuing-operations net loss.
- Current assets were $786.9 million versus current liabilities of $953.4 million, a working-capital deficit of approximately $166.5 million.
- Convertible senior notes had $250.0 million principal outstanding and a $184.2 million net carrying amount; they bear 3.25% interest and mature April 2022. The $250.0 million revolving credit facility had no borrowings; $15.0 million of letters of credit were outstanding.
- The credit agreement requires at least $400 million of unrestricted cash, including $200 million held with lenders or their affiliates. Groupon reported covenant compliance at quarter-end and stated it had sufficient liquidity for at least the next 12 months, though it cautioned that this was not assured.
Business changes, outlook and notable items
- Groupon completed the exit from 11 non-core countries between November 2016 and March 2017; their results are classified as discontinued operations. The company now focuses on 15 core countries.
- Management said it expects SG&A generally to continue declining in the second half of 2017 as restructuring savings take effect. It expected marketing expense as a percentage of gross billings to increase in both segments for full-year 2017, reflecting customer-growth investment. The restructuring plan was expected to be substantially complete by September 2017.
- In July 2017, Groupon decided to cease most food-delivery operations by the end of Q3 and entered a U.S. delivery partnership with Grubhub. A July 31 agreement to sell certain delivery-market customer lists and other intangible assets for $20 million was expected to close in Q3 or Q4. Groupon anticipated about $2 million of related restructuring costs and a $17–18 million gain on sale in Q3.
- Foreign-exchange movements affected results: reported first-half revenue was reduced by $13.8 million versus prior-year exchange rates. Q2 other income included $10.8 million in foreign-currency gains, making reported non-operating results sensitive to exchange-rate movements.
- Potentially material exposures include ongoing intellectual-property, consumer, privacy and regulatory matters. Groupon said reasonably possible losses in excess of accrued amounts were not expected to materially affect the company, but outcomes remain uncertain. Latin America sale indemnifications were estimated at $5.4 million recorded liability, with up to $25 million of obligations reasonably possible. Tax audits were ongoing; up to $36.1 million of unrecognized tax benefits could be reduced within 12 months.
Important facts for investors to verify
- Whether Local growth and improved gross margin can offset continued revenue declines, especially in North American Goods and International markets.
- Whether marketing investment produces sustained customer and gross-profit growth; active customers increased, but trailing-twelve-month gross billings per average active customer fell to $121.24 from $128.81.
- Whether cash use moderates as merchant and supplier payment timing changes, and whether Groupon continues to meet the credit facility’s minimum-cash and other covenants.
- Execution and realized proceeds from the Grubhub transition and asset sale, including the expected gain and restructuring costs.
- Potential outcomes of litigation, tax audits and indemnification obligations, alongside the value of Level 3 investments that rely on unobservable valuation inputs.