Groupon, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited financial statements. Unless noted otherwise, dollar amounts are in millions.
Business context
Groupon operates a two-sided marketplace connecting consumers with merchants, organized into North America and International segments. Its strategy is to focus on local services and experiences, improve marketplace inventory and customer engagement, and reduce its expense structure. Groupon completed its transition to a third-party goods marketplace in North America in 2020 and International in 2021, changing how much Goods revenue is reported gross versus net.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $153.2 | $266.0 | $306.5 | $529.8 |
| Gross profit | $134.0 | $193.9 | $268.0 | $360.9 |
| Operating income (loss) | $(66.5) | $(2.0) | $(98.7) | $(3.2) |
| Net income (loss) attributable to Groupon | $(91.2) | $(3.4) | $(126.1) | $11.2 |
| Adjusted EBITDA | $5.7 | $41.0 | $(1.2) | $71.3 |
| Operating cash flow | $(30.2) | $(34.4) | $(108.4) | $(80.8) |
| Free cash flow | $(39.3) | $(46.8) | $(130.5) | $(105.2) |
Q2 gross margin was approximately 87% of revenue versus 73% a year earlier; this comparison is affected by the shift from first-party Goods sales reported gross to third-party marketplace revenue reported primarily net. Q2 diluted loss per share was $3.04, compared with a $0.12 loss.
At June 30, cash and cash equivalents were $315.6, down from $498.7 at year-end 2021. Current assets were $410.5 versus current liabilities of $493.9. Debt included $60.0 outstanding under the revolving facility and $224.2 net carrying value of 2026 convertible notes; the notes had $230.0 principal. The revolver had $23.4 of letters of credit outstanding. Groupon repaid $40.0 of revolver borrowings during Q2.
Material changes versus prior periods
- Q2 revenue declined 42% year over year; gross profit fell 31%. Gross billings declined 24%, units declined 28%, and trailing-twelve-month active customers fell to 21.1 million from 24.9 million.
- Management attributed North America weakness mainly to lower platform engagement and fewer purchases, with first-quarter activity also affected by a new COVID-19 variant. International gross billings fell 18%; increased Local demand was offset by reduced Goods activity and foreign-exchange effects.
- International revenue comparisons are substantially affected by the Goods marketplace transition: Q2 2021 included $59.8 of product revenue, while Q2 2022 had none. International also recorded lower gross profit, including effects from lower unredeemed-voucher revenue and currency movements.
- SG&A decreased year over year, but remained high relative to gross profit. Operating results included $35.4 of goodwill impairment, fully impairing International reporting-unit goodwill, and $8.8 of long-lived asset impairment. A further $1.2 of lease-related impairment was included in restructuring charges.
- Other expense was $21.3 in Q2, primarily reflecting foreign-currency losses; the six-month foreign-currency and other line was a $22.9 loss, versus a $24.1 gain in the prior-year period.
Outlook, management commentary, risks and contingencies
- In August 2022, after quarter-end, Groupon announced a multi-phase cost savings plan. It estimated approximately $150 of run-rate savings from the first phase by the end of 2023. The initial restructuring phase targets approximately 500 positions, with most reductions expected by year-end 2022 and the remainder in early 2023; expected pretax charges are $10–$20, mostly cash. A further phase in 2023 is expected to address technology platform costs after cloud migration. These are estimates, not assured outcomes.
- Groupon said cash balances and operating cash generation should be sufficient for working capital and capital expenditures for at least 12 months. However, access to the full $225 revolver capacity was partially restricted by financial covenants. The company planned to seek covenant relief in the second half of 2022 and cautioned that there was no assurance it would obtain it. It reported covenant compliance as of June 30.
- Risks highlighted include continued COVID-19 effects, inflation, labor and supply pressures, weaker discretionary spending, declining customer engagement, merchant retention, currency volatility, competition, cybersecurity, and execution of strategy and restructuring. Management also noted that higher costs may not be offset through efficiencies or other measures.
- A securities class action settlement of $13.5 had received preliminary court approval; the company said insurers funded the full settlement amount into escrow in July 2022. Final approval was scheduled for October 13, 2022. Related shareholder derivative cases were stayed pending the securities case.
- The company disclosed a proposed foreign tax assessment of $112, including estimated interest, primarily concerning 2011 transfer pricing. Groupon said it believes the assessment is without merit and intends to defend it. Potential indemnification obligations related to a 2017 Latin America disposition included $2.8 accrued and approximately $11.7 of reasonably possible exposure above accruals.
- Two directors notified the company in August of their intention to resign effective August 26; the filing said the departures were not due to disagreement with the company.
Important facts for investors to verify
- Whether customer engagement, gross billings, units, and active-customer trends stabilize or continue to deteriorate, particularly in North America and Goods.
- Whether the $150 run-rate savings estimate is achieved on schedule, and the cash costs, operational effects, and later phases of the restructuring.
- Available revolver borrowing capacity, covenant calculations, and the outcome of the planned covenant-relief discussions.
- Cash burn and working-capital movements, including timing of payments to merchants and suppliers, against the company’s stated 12-month liquidity expectation.
- Final court approval and insurance coverage of the securities settlement, and developments in the proposed $112 tax assessment and other legal or tax matters.