Groupon, Inc. — Q2 2016 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2016. Groupon operates online local-commerce marketplaces across North America, EMEA, and Rest of World, offering Local, Travel, and Goods deals. Unless noted, comparisons are with the corresponding 2015 period and reflect continuing operations.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $756.0 | $738.4 | $1,488.0 | $1,488.8 |
| Gross profit (margin) | $333.6 (44.1%) | $337.0 (45.6%) | $672.9 (45.2%) | $684.4 (46.0%) |
| Operating loss | $(43.2) | $(9.2) | $(90.5) | $(3.9) |
| Loss from continuing operations | $(51.7) | $(15.3) | $(97.3) | $(32.0) |
| Net income (loss) attributable to Groupon | $(54.9) | $109.1 | $(104.0) | $94.8 |
| Adjusted EBITDA (non-GAAP) | $34.0 | $61.1 | $65.3 | $133.5 |
| Operating cash flow from continuing operations | $(54.0) | $13.3 | $(130.7) | $56.9 |
| Free cash flow (non-GAAP) | $(70.4) | $(9.1) | $(167.1) | $16.2 |
Q2 basic and diluted loss per share was $0.10; first-half loss per share was $0.18. The prior-year net income comparisons include Ticket Monster discontinued-operations income of $127.2 million for Q2 and $133.5 million for the first half, including the disposition gain; they are not directly comparable with 2016 continuing-operations results.
Liquidity, debt, and capital
- Cash and cash equivalents were $780.1 million at June 30, down from $853.4 million at December 31, 2015. Current assets were $1,039.2 million versus current liabilities of $1,077.1 million.
- Groupon issued $250 million of 3.25% senior convertible notes due 2022; net proceeds were $243.2 million. The notes’ balance-sheet carrying amount was $174.0 million after debt discount. The company bought note hedges and sold warrants, intended to offset dilution up to a higher effective conversion price of $8.50 per share; warrants may dilute above their $8.50 strike.
- A $250 million secured revolving credit facility was extended to June 2019; no borrowings were outstanding, and the company reported covenant compliance. The facility requires at least $400 million of unrestricted cash, including $200 million in accounts with lenders or affiliates.
- First-half financing cash flow included $90.4 million of treasury-stock purchases. The company reported $269.3 million remaining under its expanded share repurchase authorization.
Material changes and management outlook
- Q2 revenue rose 2.4%, but gross billings fell 2.4% to $1,492.9 million; first-half revenue was nearly flat while gross billings fell 3.8%. Direct Goods revenue increased, partly offsetting declines in third-party revenue. Direct revenue is reported gross, so revenue growth does not translate proportionately into gross profit or cash flow.
- North America gross billings grew 7.8% in Q2, while EMEA fell 12.0% and Rest of World fell 27.1%. Active customers increased to 50.0 million trailing twelve-month customers, but gross billings per average active customer declined to $124.51 from $133.12; Q2 units fell to 50.9 million from 53.1 million.
- Management attributed weaker operating results primarily to higher customer-acquisition marketing and restructuring costs. Q2 marketing expense increased 61% to $92.0 million; management expected $150–$200 million of incremental marketing expense for full-year 2016 versus 2015 and planned to continue investing. The company extended its customer-marketing return-on-investment horizon to 12–18 months from about six months.
- Groupon is shifting away from lower-margin Goods products. Management said this improved direct Goods gross margins, but may weigh on revenue in the near term. It also expects SG&A generally to decline through the rest of 2016 from restructuring and other savings. No specific revenue or earnings forecast was provided.
- The restructuring plan has exited six Rest of World and eleven EMEA countries. First-half charges were $28.5 million, including workforce reductions affecting about 750 employees; cumulative restructuring costs through June were $50.8 million, plus $7.3 million of asset impairments. Management continued to consider further actions and an international-market strategic review.
- Management expected 2016 operating cash flow to be significantly lower than in prior years, citing incremental marketing, restructuring, and the securities-litigation settlement. It believed cash and operating cash generation should cover working capital and capital expenditure needs for at least 12 months, while noting cash-flow volatility from merchant/supplier payment timing and seasonality.
Risks, contingencies, and unusual items
- Brexit-related currency movements were expected to adversely affect reported EMEA gross billings and revenue in the second half of 2016; management also cited possible economic, trade, and regulatory uncertainty.
- The $45 million securities-litigation settlement was funded into escrow by the company and its insurer and fully reserved at quarter-end. Final court approval was granted July 13, 2016, after the reporting date. Other matters include pending IBM patent litigation, derivative litigation with a proposed corporate-reforms settlement, regulatory inquiries, and other intellectual-property claims.
- Groupon recorded $9.3 million of gains on the Russia and Breadcrumb dispositions. Fair-value losses on investments were $4.6 million in Q2 and $5.7 million in the first half. Up to $24.3 million of changes in unrecognized tax benefits were considered reasonably possible within 12 months.
- Key stated risks include marketing-investment productivity, customer and merchant retention, competition, foreign exchange, fraud and payment processing, cybersecurity, litigation, and compliance with credit-facility covenants.
Investor verification points
- Track whether increased marketing converts into durable customer growth and higher spending per customer, rather than relying on customer counts alone.
- Verify progress in North America against continued EMEA and Rest of World contraction, including currency and country-exit effects.
- Assess whether Goods margin improvement and the mix shift can offset lower third-party revenue and weak operating cash flow.
- Monitor cash use, seasonal merchant and supplier payables, restructuring payments, share repurchases, and the facility’s minimum-liquidity covenant.
- Review note and warrant dilution exposure, the final impact of the litigation settlement, and developments in tax audits and other legal proceedings.