Groupon, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. Groupon operates online local-commerce marketplaces across North America, EMEA, and Rest of World. Unless noted, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $713.6 million | $714.3 million | $2,202.3 million | $2,158.9 million |
| Gross profit | $328.9 million | $355.3 million | $1,013.3 million | $1,087.2 million |
| Gross margin | 46.1% | 49.7% | 46.0% | 50.4% |
| Operating income (loss) | $(70.4) million | $1.0 million | $(74.4) million | $(2.9) million |
| Continuing-operations income (loss) | $(24.6) million | $(12.6) million | $(56.6) million | $(45.0) million |
| Net income (loss) attributable to Groupon | $(27.6) million | $(21.2) million | $67.2 million | $(81.9) million |
| Adjusted EBITDA (non-GAAP) | $56.3 million | $63.9 million | $189.8 million | $169.4 million |
| Free cash flow (non-GAAP) | $(35.3) million | $3.7 million | $(25.4) million | $(84.2) million |
Cash, liquidity, and capital
- Cash and cash equivalents were $963.6 million at September 30, 2015, down $53.1 million from December 31, 2014. Current assets of $1,283.0 million slightly exceeded current liabilities of $1,282.9 million.
- Short-term borrowings were $195.0 million under a $250.0 million revolving facility; Groupon reported compliance with its covenants. The facility requires at least $400 million of unrestricted cash, including $200 million held with lenders or their affiliates.
- Nine-month cash from operating activities was $43.1 million from continuing operations, compared with cash used of $20.8 million in the prior-year period. Including discontinued operations, operating cash flow was $6.5 million, versus $2.0 million.
- Continuing-operations investing activities used $146.0 million, including $70.1 million for acquisitions and $68.5 million for capital expenditure and capitalized software. Financing activities used $186.0 million, including $329.4 million of share repurchases, partly offset by $195.0 million of borrowings.
- Groupon repurchased 65.9 million shares for $334.1 million in the first nine months; $268.1 million remained available under the $500 million authorization. Management said available cash and operating cash generation should cover requirements for at least 12 months, while noting this was not assured.
Material changes and operating trends
- Q3 revenue was nearly flat year over year; nine-month revenue rose 2.0%. Direct revenue, primarily Goods sold as merchant of record, increased to $387.3 million in Q3 and $1,175.1 million for nine months. Third-party revenue declined to $311.9 million and $991.8 million, respectively.
- Goods represented 57.7% of Q3 revenue, up from 53.4%. The larger mix of lower-margin direct Goods sales contributed to lower consolidated gross margin. Direct-revenue gross margin was 12.6% in Q3 and 11.2% for nine months, both modestly above prior-year levels.
- Foreign exchange was a significant headwind: management estimated a $48.3 million adverse Q3 revenue impact and a $153.8 million adverse nine-month impact. North America revenue grew, while EMEA and Rest of World revenue declined.
- Trailing-twelve-month active customers were 48.6 million versus 46.6 million; gross billings per average active customer declined to $131.72 from $136.95. Units sold were 51.9 million in Q3 versus 51.6 million, and 158.6 million for nine months versus 151.9 million.
- Nine-month net income included $133.5 million of income from discontinued operations, principally a $202.2 million pretax gain on the May sale of a controlling stake in Ticket Monster. Groupon retained a minority interest valued at $122.1 million. The reported continuing-operations loss remained $56.6 million.
Outlook, management commentary, and risks
- Groupon planned a significant increase in marketing spending beginning in Q4 2015 to accelerate customer growth, warning this was expected to increase near-term operating losses and reduce Adjusted EBITDA.
- The company began de-emphasizing lower-margin Goods products and seeking higher-margin offerings and more third-party sellers. Management expected near-term revenue pressure while aiming to improve Goods margins.
- A third-quarter restructuring plan targets workforce reductions, primarily internationally, and closure of operations in six Rest of World and three EMEA countries. It affected approximately 1,200 employees; charges were $24.1 million to date, with total pretax charges expected up to $35 million through September 2016. Management warned execution could disrupt operations and benefits might not materialize.
- Groupon was conducting a strategic review of certain non-core businesses and international markets, including possible divestitures, but gave no assurance about likelihood, timing, or transaction type. Groupon India’s majority-interest financing resulted in a $13.7 million pretax gain but no cash proceeds.
- Q3 operating results included $37.5 million of additional expense for the securities-litigation contingency, $24.1 million of restructuring charges, a $6.7 million write-off of a discontinued EMEA marketing prepayment, and a $13.7 million gain on the Groupon India disposition.
- Risks include competition, customer and merchant retention, lower deal margins, foreign-exchange volatility, Goods inventory and fulfillment costs, and execution of strategic changes. Foreign tax authorities had issued VAT assessments totaling $43.5 million; Groupon disputed them. Securities litigation remained ongoing, and the company said loss estimates and outcomes were uncertain.
- Management cited a favorable $54.0 million Q3 income-tax benefit on the continuing-operations pretax loss; the effective tax rate is affected by jurisdictional losses, valuation allowances, uncertain tax positions, and intercompany tax items.
Investor verification priorities
- Reconcile reported net income with continuing results and the Ticket Monster disposal gain; assess the recurring earnings base.
- Track whether higher marketing spend improves customer activity and gross billings enough to offset expected near-term losses and lower Adjusted EBITDA.
- Verify Goods mix, direct-sales margins, inventory and fulfillment costs, and progress in shifting toward higher-margin products.
- Monitor operating cash flow and working-capital movements, especially merchant and supplier payables, alongside cash levels, borrowings, and credit-facility covenants.
- Follow restructuring costs and execution, the strategic review, securities-litigation developments, and the disputed $43.5 million VAT assessments.
- Consider that Adjusted EBITDA and free cash flow are non-GAAP measures; review their reconciliations and the exclusions used.