Groupon, Inc. — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Groupon operates online local-commerce marketplaces in 15 countries, across North America and International segments.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $578.4 million | $626.5 million | Down 7.7% |
| Gross profit | $306.0 million | $324.9 million | Down 5.8% |
| Gross margin | 52.9% | 51.8% | Up 1.1 percentage points |
| Operating income | $2.2 million | $3.4 million | Down $1.2 million |
| Net loss attributable to Groupon | $42.5 million | $6.9 million | Loss widened |
| Adjusted EBITDA | $47.0 million | $52.6 million | Down 10.7% |
| Cash from operating activities | $(147.5) million | $(119.7) million | Cash use increased |
| Free cash flow | $(165.0) million | $(139.9) million | Cash use increased |
Cash and cash equivalents were $645.6 million at quarter-end, down from $841.0 million at December 31, 2018. Current assets were $812.0 million and current liabilities $794.1 million. The company had $250.0 million of convertible notes outstanding at face value ($204.8 million net carrying amount), bearing 3.25% interest and maturing in April 2022. It had no revolving-credit borrowings; $17.5 million of letters of credit were outstanding. Operating lease obligations were $141.2 million.
Material changes and management commentary
- Gross billings fell 9.1% to $1.176 billion and units sold fell 12.3% to 37.2 million. Trailing-twelve-month active customers declined to 47.2 million from 49.7 million; gross profit per active customer rose to $27.59 from $27.16.
- Revenue declined in both segments: North America down 9.2% and International down 5.2%. Management cited lower traffic, particularly from email and search, and fewer purchases. Foreign exchange reduced reported revenue by $17.7 million; at prior-year exchange rates, revenue would have been $596.1 million.
- Operating results included a $41.4 million loss from fair-value changes in minority investments, principally a $41.5 million write-down of Monster LP. This drove much of the increase in other expense and the wider net loss. The quarter also included a $2.2 million benefit in discontinued operations from expiration of certain indemnification obligations.
- Management expects declining active customers in North America to continue during 2019 and, to some extent, into 2020, and expects the decline in units to continue in 2019. It is prioritizing higher-value customers, investing in International, and developing voucherless cash-back and booking features; these initiatives may pressure near-term gross profit, operating income, or cash flow. No quantified full-year revenue or earnings guidance is provided.
- Operating cash use was primarily associated with working-capital changes, including seasonal supplier payments. The company noted that scaling card-linked cash-back offers may initially worsen cash flow because customer incentives are paid before merchant reimbursement is collected.
Risks, contingencies, and other notable items
- The $250.0 million revolving credit facility was due to mature in June 2019. Groupon said it was pursuing refinancing and expected it to close in Q2 2019; it reported covenant compliance at March 31, 2019. The facility requires at least $400 million of unrestricted cash, including $200 million held with lenders or affiliates.
- A foreign tax authority proposed a $108.5 million assessment, primarily relating to transfer pricing in 2011. Groupon said it considers the assessment without merit and intends to defend it. The filing also describes ongoing tax audits and other legal, consumer, privacy, and intellectual-property matters.
- Possible indemnification obligations beyond amounts accrued were estimated at approximately $13.3 million. Management stated that reasonably possible legal losses in excess of accruals were not expected to have a material adverse effect, while noting litigation can still divert resources and create costs.
- Adoption of lease accounting guidance on January 1, 2019 added $109.6 million of lease assets and liabilities. The accounting change affects balance-sheet comparability with prior periods.
- The filing highlights international-market, foreign-exchange, Brexit, regulatory, cybersecurity, cloud-platform, competition, merchant-retention, and minority-investment valuation risks. Management reported disclosure controls were effective and no other material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and terms of the expected Q2 2019 refinancing of the revolving facility, including covenant headroom and liquidity requirements.
- Whether customer, unit, and gross-billings declines continue, and whether customer-value and product initiatives improve gross profit and repeat purchasing.
- Valuation assumptions and subsequent performance of Monster LP and other minority investments, given the $41.5 million Q1 write-down.
- Cash conversion and working-capital trends after seasonal supplier payments, and the cash-flow impact as card-linked offers scale.
- Developments in the $108.5 million tax assessment, other tax audits, and the estimated $13.3 million of possible excess indemnification obligations.