Groupon, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Groupon operates a local-commerce marketplace and reports North America and International segments. Comparisons are with Q1 2011, whose income statement was restated to present most deal revenue net of merchant payments.
Key financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $559.3 million | $295.5 million |
| Gross billings | $1,354.8 million | $668.2 million |
| Cost of revenue | $119.5 million | $39.8 million |
| Marketing expense | $116.6 million | $230.1 million |
| Selling, general and administrative expense | $283.6 million | $142.8 million |
| Income (loss) from operations | $39.6 million | $(117.1) million |
| Net income (loss) | $(3.6) million | $(113.9) million |
| Net loss attributable to common stockholders | $(11.7) million | $(146.5) million |
| Cash provided by operating activities | $83.7 million | $17.9 million |
| Capital expenditures | $13.1 million | $11.0 million |
| Free cash flow (company-defined, non-GAAP) | $70.6 million | $7.0 million |
- Revenue rose 89% year over year, while gross billings rose 103%. International revenue increased to $320.7 million, or 57.3% of total revenue, from $158.9 million, or 53.8%.
- GAAP operating results improved substantially as marketing expense declined and revenue grew. The company’s non-GAAP consolidated segment operating income was $67.6 million, versus a $98.3 million loss in Q1 2011; this measure excludes stock-based compensation and acquisition-related items.
- Despite pretax income of $31.0 million, Groupon recorded $34.6 million of income tax expense, an effective rate of 111.6%. The filing attributes the elevated rate to losses in jurisdictions where tax benefits were not recognized and amortization of prepaid taxes related to prior-period intellectual-property transactions.
Financial position and liquidity
- At March 31, 2012, cash and cash equivalents were $1.161 billion, up from $1.123 billion at year-end 2011. Current assets were $1.385 billion and current liabilities were $1.066 billion.
- Accrued merchant payables were $576.5 million, compared with $520.7 million at year-end. The company notes that merchant-payment timing can materially affect working capital and operating cash flow.
- Total liabilities were $1.154 billion. The filing states that Groupon had no long-term borrowings and no off-balance-sheet arrangements at quarter-end.
- Operating cash flow included a $46.0 million increase in merchant payables. Investing activities used $46.4 million, primarily for acquisitions, investments, and capital expenditures; financing activities used $8.3 million.
Management outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management expects the share of revenue from outside North America to continue increasing and expects operating expenses to rise as it invests in marketing, technology, sales capacity, facilities, and expansion.
- Management said available cash and expected operating cash flow should meet working-capital and capital-expenditure needs for the next 12 months, while cautioning that this is not assured. It expected operating cash flow to remain positive in the foreseeable future.
- Customer refunds were a notable risk: Groupon said refund rates had risen above historical levels following a shift in deal mix and higher-price offers. The refund reserve increased to $81.6 million from $67.5 million at year-end.
- Disclosure controls were deemed ineffective because of a material weakness in the financial-statement close process, including deficiencies in reconciliations and review of estimates such as refund reserves. Remediation was underway, but the company could not assure effectiveness by year-end 2012.
- After revising its Q4 and full-year 2011 results on March 30, 2012, Groupon and certain current and former directors and officers faced securities class actions and shareholder derivative lawsuits. The company said it intended to defend them and believed their ultimate outcomes would not materially affect the business, while noting litigation costs and uncertainty.
- The Q1 2011 comparative income statement was restated to correct revenue presentation: deal revenue was reported net of merchant fees rather than gross. The adjustment reduced previously reported revenue and cost of revenue, but did not change pretax loss, net loss, or per-share amounts.
- Other principal risks identified include competition, customer and merchant retention, international expansion and foreign-exchange exposure, regulatory treatment of Groupons and unredeemed balances, tax uncertainty, and the execution of new products and acquisitions.
Important facts for investors to verify
- Progress and independent assessment of the material-weakness remediation, particularly controls over the close, account reconciliations, and refund estimates.
- Whether refund rates and the $81.6 million reserve adequately reflect claims, and whether merchant reimbursement rights cover those claims.
- Cash-flow quality: the extent to which operating cash flow depends on growth in merchant payables and the timing of merchant payments.
- Whether revenue and segment profitability can be sustained as marketing spending changes and the International segment becomes a larger share of the business.
- Developments in the securities and derivative litigation, gift-card and unclaimed-property matters, and related regulatory or tax exposures.