Groupon, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Reports the unaudited quarter ended March 31, 2016, compared with the three months ended March 31, 2015. Groupon operates online local-commerce marketplaces, organized into North America, EMEA, and Rest of World. Results are presented primarily for continuing operations; Ticket Monster, sold in 2015, is reported as discontinued operations in the prior-year comparison.
Key financial metrics
Amounts below are USD millions except per-share data and where stated.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $732.0 | $750.4 |
| Gross profit / gross margin | $339.3 / 46.4% | $347.4 / 46.3% |
| Operating income (loss) | $(47.3) | $5.3 |
| Continuing-operations net income (loss) | $(45.6) | $(16.7) |
| Net income (loss) attributable to Groupon | $(49.1) | $(14.3) |
| Diluted loss per share | $(0.08) | $(0.02) |
| Adjusted EBITDA (non-GAAP) | $31.3 | $72.4 |
| Operating cash flow, continuing operations | $(76.7) | $43.6 |
| Free cash flow (non-GAAP) | $(96.7) | $25.3 |
- Gross billings decreased 5.2% to $1,472.0 million; revenue decreased 2.5%. Third-party revenue fell 9.9% to $316.7 million, while direct revenue increased 1.8% to $397.4 million.
- Marketing expense rose 70.9% to $89.8 million. Restructuring charges were $12.4 million. SG&A declined 3.1% to $281.0 million.
- North America revenue increased 4.4% to $500.8 million; EMEA declined 12.6% to $189.0 million; Rest of World declined 22.2% to $42.2 million.
- Cash and cash equivalents were $688.5 million at quarter-end, down from $853.4 million at December 31, 2015. Current assets were $896.8 million and current liabilities $1,102.7 million.
- No revolving-credit borrowings were outstanding at March 31. Capital lease obligations totaled $52.2 million, including $26.7 million current and $25.5 million non-current.
Material changes versus the prior comparable period
- Operating results weakened: the company moved from $5.3 million operating income to a $47.3 million operating loss. Adjusted EBITDA fell by $41.0 million.
- Management attributed the larger operating loss principally to $37.2 million of additional marketing expense and $12.4 million of restructuring charges.
- Direct Goods gross profit increased to $51.5 million from $39.0 million; direct Goods gross margin improved to 13.0% from 10.0%. Management said the shift away from lower-margin Goods products improved category margins but was expected to weigh on near-term revenue.
- Trailing-twelve-month active customers increased to 49.4 million from 48.1 million, while gross billings per average active customer fell to $126.77 from $134.62. Quarterly units declined to 52.2 million from 53.7 million.
- International contraction, market exits, and currency effects weighed on results. Gross billings declined 14.6% in EMEA and 28.2% in Rest of World; North America gross billings increased 4.8%.
Outlook, risks, contingencies, and unusual items
- Groupon expected $150 million–$200 million of incremental marketing expense in full-year 2016 versus 2015, primarily in North America. It extended marketing-investment payback thresholds to 12–18 months from about six months.
- Management expected SG&A generally to decline through the remainder of 2016 from restructuring and other cost initiatives, while continuing to consider further restructuring and review of international markets. It cautioned that operating cash flow for 2016 would be lower than in prior years.
- Management believed available cash and operating cash generation should cover working-capital and capital-expenditure needs for at least 12 months, but this is subject to execution, cash-flow variability, and the stated risks. Q1 operating cash use reflected, among other factors, a $112.4 million decline in accrued merchant and supplier payables.
- After quarter-end, Groupon issued $250 million of senior convertible notes at 3.25%. The note terms describe maturity on April 1, 2022, an initial conversion price of $5.40 per share, and potential cash, share, or combined settlement. The filing also refers to the notes as due 2020 in other passages; this maturity-date inconsistency should be checked against the indenture and subsequent filings.
- The board increased the share-repurchase authorization by $200 million and extended it through April 2018 after quarter-end. Groupon had repurchased 18.8 million shares for $63.4 million during Q1, with $93.6 million remaining under the prior authorization at quarter-end.
- A $45 million securities-litigation settlement was fully reserved at quarter-end; $39.5 million was placed in escrow after preliminary approval, with the remaining $5.5 million expected from insurance. Final court approval was still pending. An IBM patent suit seeks unspecified damages, including potentially trebled damages, and injunctive relief; Groupon said it would defend the matter.
- Foreign tax authorities’ remaining VAT assessments totaled $3.9 million after a $40.1 million potential assessment was superseded by an audit closing agreement. The company said it believed the remaining assessments lacked merit. It also said changes of up to $23.8 million in unrecognized tax benefits were reasonably possible within 12 months.
- Foreign exchange remained a source of volatility: currency movements reduced Q1 revenue by $14.1 million and gross billings by $35.7 million versus prior-year exchange rates. Other income included $6.5 million of foreign-currency gains, partly offset by investment losses and restructuring-related translation losses.
Most important facts for investors to verify
- Reconcile the notes’ April 1, 2022 maturity date with references elsewhere in the filing to notes due 2020; review the indenture, conversion provisions, and any hedge or warrant transactions.
- Track whether increased marketing produces durable customer, transaction, and gross-billings growth, particularly given lower spend per active customer and the longer stated payback period.
- Monitor cash conversion and working-capital movements, including supplier-payable timing, alongside cash levels, repurchases, restructuring outlays, and the new convertible debt.
- Assess whether Goods margin gains and international restructuring offset revenue declines, currency exposure, and ongoing segment losses.
- Follow final approval and funding of the $45 million securities settlement, the IBM litigation, remaining VAT assessments, and potential tax-audit adjustments.