Groupon, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Groupon operates online local-commerce marketplaces in North America and internationally, across Local, Goods and Travel. Results are unaudited.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $626.5 million | $673.6 million |
| Gross profit; gross margin | $324.9 million; 51.9% | $309.5 million; 45.9% |
| Operating income (loss) | $3.4 million | $(11.7) million |
| Net loss attributable to Groupon, Inc. | $(6.9) million; $(0.01) per share | $(24.4) million; $(0.04) per share |
| Adjusted EBITDA (non-GAAP) | $52.6 million | $44.8 million |
| Cash from operating activities | $(119.7) million | $(138.1) million |
| Free cash flow (non-GAAP) | $(139.9) million | $(152.2) million |
Cash and cash equivalents were $725.9 million at quarter-end, down from $880.1 million at December 31, 2017. Current assets were $896.8 million and current liabilities $857.9 million. Total liabilities were $1.153 billion. Convertible notes had $250.0 million principal and a $192.6 million net carrying value; the notes mature in April 2022 and bear 3.25% stated interest. There were no revolver borrowings, with $23.4 million of letters of credit outstanding under the $250 million facility. Groupon reported compliance with its covenants.
Operating cash outflow was driven principally by a $168.1 million net working-capital and other-assets-and-liabilities outflow, primarily seasonal supplier payments. Investing cash outflow was $20.4 million, including $20.1 million of property, equipment and software purchases; financing cash outflow was $20.9 million.
Changes versus the prior comparable period
- Revenue declined 7.0%; service revenue was nearly flat, while product revenue fell 12.7%. Gross profit rose 5.0%, lifting gross margin to 51.9% from 45.9%.
- North America revenue decreased 16.9% to $393.3 million; International revenue grew 16.5% to $233.3 million, including favorable currency effects. Operating results improved in both segments: North America reported a $1.9 million operating loss versus a $14.8 million loss; International operating income increased to $5.2 million from $3.1 million.
- Gross billings decreased 4.8% to $1.293 billion and units fell to 42.4 million from 45.7 million. Trailing-twelve-month active customers increased to 49.7 million from 48.3 million, but gross billings per active customer declined to $112.34 from $117.43.
- Marketing expense increased 14.8% to $99.2 million. SG&A declined 4.3% to $222.1 million, which management attributed to cost-efficiency efforts. Operating results also benefited from lower restructuring charges and higher gross profit.
- Other expense, net worsened to $8.5 million from $4.6 million, principally reflecting a $5.0 million net loss on fair-value investments and $5.5 million interest expense. The reported net loss nevertheless narrowed year over year.
Outlook, accounting changes and risks
- No formal revenue or earnings guidance is provided. Management said cash, operating cash flows and available borrowing capacity should meet working-capital and capital-expenditure needs for at least the next 12 months.
- Groupon is shifting North American emphasis toward Local and developing voucherless Groupon+ and appointment-booking features. Management cautioned these initiatives may pressure near-term gross profit, operating income and cash flow as they scale; Groupon+ may also reduce reported gross billings relative to voucher sales.
- ASC 606 was adopted January 1, 2018 using the modified-retrospective method. It increased opening equity by $88.9 million and changed the timing/classification of revenue, refunds, customer credits and merchant-acquisition costs. Q1 reported revenue was $1.8 million lower than it would have been without adoption, while reported operating income was $8.4 million higher. Prior-year results were not restated, limiting comparability; estimates for voucher breakage and refunds could materially differ from actual outcomes.
- Groupon received foreign tax assessments and proposed assessments totaling $141.8 million, primarily concerning transfer pricing for 2011–2014; management disputes them and intends to defend its position. It also disclosed approximately $19.0 million of reasonably possible indemnification obligations above accrued amounts related to divestitures.
- Significant litigation includes IBM patent claims against Groupon in Delaware, with trial scheduled for July 2018, and Groupon’s patent case against IBM in Illinois. The filing does not quantify a probable loss for these matters. The company also identifies cybersecurity, privacy, consumer-protection, merchant-retention, competition, foreign-exchange and execution risks.
- After quarter-end, Groupon acquired 80% of UK-based Cloud Savings for an estimated total price of approximately $72.7 million. In May, the board authorized a new share-repurchase program of up to $300 million; purchases are discretionary and subject to credit-agreement limitations.
Key facts for investors to verify
- Whether declining North American gross billings and customer spend stabilize as Groupon reduces Goods exposure and develops Local and Groupon+ offerings.
- How much reported growth in gross profit and operating income reflects underlying performance versus currency effects and ASC 606 timing and estimates.
- Cash-flow seasonality, supplier-payment timing, the cash impact of scaling Groupon+, and ongoing compliance with the credit facility’s minimum-liquidity covenants.
- Developments in the $141.8 million tax assessments, IBM litigation and divestiture indemnification exposures.
- Cloud Savings’ integration, performance and final purchase-price allocation, and whether any of the newly authorized repurchases are made.