Groupon, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited interim results. Groupon operates an online local-commerce marketplace and reports North America, EMEA, and Rest of World segments.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $595.1 million | $568.6 million | $1,805.2 million | $1,696.2 million |
| Gross profit | $359.6 million | $386.8 million | $1,123.3 million | $1,259.7 million |
| Gross margin | 60.4% | 68.0% | 62.2% | 74.3% |
| Income from operations | $13.8 million | $25.4 million | $62.4 million | $111.6 million |
| Net income (loss) attributable to Groupon, Inc. | $(2.6) million | $(1.6) million | $(14.1) million | $26.2 million |
| Operating cash flow | $(11.9) million | $42.1 million | $40.2 million | $201.1 million |
| Free cash flow (non-GAAP) | $(27.0) million | $26.1 million | $(3.4) million | $145.3 million |
Gross billings rose 10.2% to $1.343 billion in Q3 and 7.9% to $4.164 billion for the nine-month period. The company reported $1.140 billion of cash and cash equivalents at September 30, 2013, down from $1.209 billion at December 31, 2012. Current assets were $1.393 billion and current liabilities $1.016 billion. No material borrowing debt was reported; long-term capital lease obligations were $4.6 million.
Material changes and drivers
- Revenue growth was driven by direct revenue, primarily Goods, which rose $55.1 million in Q3 and $322.7 million year to date. Direct sales are reported gross, but have lower margins than Local deals and carry inventory, shipping, and fulfillment costs.
- Gross profit fell despite revenue growth: cost of revenue increased $53.7 million in Q3 and $245.4 million year to date, largely with the expansion of direct Goods sales. Direct gross margin was 9.3% in Q3 versus 12.0% a year earlier.
- Third-party revenue declined $26.5 million in Q3 and $206.2 million year to date. Management cited lower merchant take rates as it accepted less favorable deal margins to attract merchants and improve deal quality.
- Segment performance diverged. Q3 revenue rose 23.7% in North America to $360.8 million, while it fell 21.0% in EMEA to $148.0 million and 3.8% in Rest of World to $86.3 million. Rest of World remained loss-making on the company’s segment operating measure.
- Marketing expense declined to $53.3 million in Q3 from $70.9 million and to $158.3 million year to date from $275.9 million, as spending shifted from customer acquisition toward activation. SG&A increased to $294.1 million in Q3 and $904.9 million year to date.
- Operating cash flow fell $161.0 million year over year for the nine-month period. A $72.3 million decrease in accrued merchant and supplier payables, chiefly related to timing of payments for late-2012 Goods sales, was a key factor.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management expects operating cash flow to remain positive in the foreseeable future and believes cash and operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months. It also expects direct Goods revenue to continue growing and anticipates a significantly higher share of direct Goods revenue in EMEA in Q4 2013.
- Management plans continued investment in technology, merchant products, facilities, and strategic acquisitions. A U.S. warehouse was expected to become operational in Q4 2013; transition costs could increase fulfillment expense near term before any expected efficiencies.
- On November 6, 2013, Groupon agreed to acquire LivingSocial Korea, including Ticket Monster, for $260 million, with at least $100 million in cash. Closing was expected in the first half of 2014, subject to regulatory approval and customary conditions.
- Q3 2012 included a one-time $18.5 million increase in German unredeemed-voucher revenue. Nine-month 2012 other income also included a $56.0 million gain on the E-Commerce transaction; 2013 other expense included $10.9 million of foreign-exchange and other losses.
- The effective tax rate was unusually high: 108.8% in Q3 and 119.2% for the nine months. Management cited losses in jurisdictions where tax benefits were not recognized, amortization of intercompany tax effects, and nondeductible stock compensation.
- Key risks include competition and pressure on merchant take rates, international-market weakness and foreign exchange, customer and merchant retention, refund estimates, Goods inventory and fulfillment, regulatory and tax uncertainty, and cybersecurity. The filing disclosed a May 2013 breach of a Taiwan subscriber database containing usernames and passwords.
- Legal matters include a securities class action whose motion to dismiss was denied in September 2013, with class-certification proceedings pending, and an $8.5 million marketing-practices settlement under appeal. The company said it could not estimate reasonably possible losses beyond accrued amounts; it believed the matters would not materially adversely affect results, while noting litigation can still impose costs and operational burdens.
- The F-tuan investment was carried at $84.0 million versus estimated fair value of $82.5 million. Management did not record an impairment, but warned deterioration in the investee or a lower-priced funding round could require a future charge.
- The board authorized up to $300 million of repurchases over 24 months; $9.0 million had been spent by September 30. Management reported disclosure controls effective and no material change in internal control during the quarter.
Investor verification priorities
- Track whether Goods-driven gross revenue growth converts into gross profit and operating cash flow, given its lower margins and fulfillment costs.
- Monitor merchant take rates, gross billings per active customer (down to $136.99 from $148.78), customer activity, and segment trends, especially EMEA and Rest of World.
- Reconcile cash generation against working-capital swings, merchant payment terms, capital spending, repurchases, and the planned Korea acquisition.
- Assess the execution and cost impact of internal fulfillment, EMEA direct-sales expansion, and ongoing technology and merchant-product investments.
- Follow tax-rate and valuation-allowance developments, the F-tuan valuation, voucher-related legal and regulatory exposure, and cybersecurity disclosures.
- Check the outcome and financial implications of the pending litigation and whether the Korea acquisition closes on disclosed terms.