Groupon, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Groupon operates online marketplaces connecting consumers and merchants, with North America and International segments. Figures below are in U.S. dollars; financial statement amounts are unaudited.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $592.9 million | $634.5 million | $1,836.8 million | $1,970.7 million |
| Gross profit | $306.0 million | $309.4 million | $954.5 million | $946.9 million |
| Gross margin | 51.6% | 48.8% | 52.0% | 48.1% |
| Operating income (loss) | $53.0 million | $(1.2) million | $(7.8) million | $(20.3) million |
| Net income (loss) attributable to Groupon | $44.6 million | $0.1 million | $(57.3) million | $(33.7) million |
| Adjusted EBITDA (non-GAAP) | $56.4 million | $46.6 million | $165.2 million | $144.7 million |
| Operating cash flow | $(57.4) million | $21.8 million | $(133.0) million | $(135.7) million |
| Free cash flow (non-GAAP) | $(73.5) million | $7.5 million | $(186.6) million | $(179.4) million |
At September 30, cash and cash equivalents were $572.4 million, down from $880.1 million at year-end 2017. Cash, cash equivalents and restricted cash totaled $575.4 million. Current assets were $752.0 million versus current liabilities of $771.2 million. Convertible notes had a $250.0 million principal balance and $198.6 million net carrying amount; the company had no revolver borrowings. The $250 million revolving credit facility had $18.3 million of letters of credit outstanding.
Material changes and operating trends
- Q3 revenue declined 6.6% year over year; nine-month revenue declined 6.8%. North America revenue fell 12.8% in Q3 and 15.3% year to date, while International revenue rose 5.2% and 11.2%, respectively.
- Gross profit was nearly flat in Q3 and rose 0.8% year to date despite lower revenue. Management attributed improved Goods margins partly to lower shipping and fulfillment costs and pricing decisions.
- Q3 operating profit included a $40.4 million SG&A benefit from the IBM settlement. The company had recorded a $75.0 million charge in Q2 related to the jury award. The $57.5 million settlement was allocated partly to a future-use license, with $15.4 million capitalized.
- Gross billings fell 9.3% in Q3 and 7.1% year to date. Units sold declined 10.6% in Q3 and 9.3% year to date. Trailing-twelve-month active customers were 48.8 million, compared with 49.1 million a year earlier.
- North America weakness reflected lower organic traffic, reduced Goods volume, and a shift from traditional food-and-drink vouchers toward Groupon+ cash-back offers. International gross billings were broadly flat in Q3 and up 6.8% year to date, with year-to-date growth aided by foreign exchange.
- ASC 606 adoption reduced opening accumulated deficit by $88.9 million. It also changed revenue, refund, voucher-breakage and contract-cost accounting; the company reports 2018 under the new guidance while prior-year figures remain under the previous rules. Management reported a $17.7 million favorable year-to-date gross-profit impact versus prior guidance, principally from voucher accounting timing.
Outlook, liquidity, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects North American active-customer declines to continue through the remainder of 2018 and into 2019. Groupon+ may initially weigh on cash flow because customer cash-back payments precede merchant collections; scaling the offering may also reduce reported gross billings.
- Management stated that cash and operating cash generation should be sufficient for working capital and capital expenditures for at least the next 12 months. The credit facility requires at least $400 million of unrestricted cash, including $200 million at lender-affiliated institutions; Groupon reported covenant compliance at quarter-end and intends to refinance the facility in the first half of 2019.
- The IBM settlement resolved related patent proceedings. Other legal, intellectual-property, consumer and regulatory matters remain possible risks. Groupon estimated up to $18.0 million of reasonably possible indemnification obligations above accrued amounts related to divested operations.
- Groupon disputes foreign tax assessments and proposed assessments totaling $133.6 million, primarily concerning transfer pricing for 2011–2014, and says it intends to defend its position. It also said reductions of up to $41.6 million in unrecognized tax benefits may occur within 12 months.
- Other unusual year-to-date items included $10.2 million of investment impairments and $12.2 million of foreign-currency losses. The Cloud Savings acquisition, completed April 30, added an 80% interest for consideration valued at $74.3 million; the acquired business contributed $7.3 million of revenue through September 30.
- The filing identifies ongoing risks including declining customer traffic, merchant retention and competition, foreign-exchange exposure, cybersecurity, refunds, litigation, tax matters and execution of product and marketing initiatives. Management expects the 2019 lease-accounting standard to materially affect the balance sheet.
Important facts for investors to verify
- How much of Q3 operating income and net income reflects the IBM settlement benefit, and what recurring profitability looks like excluding that item.
- Whether customer, unit and North American gross-billings declines stabilize, and whether Groupon+ grows gross profit without worsening cash conversion more than expected.
- Cash-flow seasonality, working-capital outflows and the ability to maintain the credit agreement’s minimum-cash requirements while refinancing the facility in 2019.
- The resolution and potential financial effects of the $133.6 million foreign tax assessments, other tax audits, and remaining legal and indemnification contingencies.
- The comparability of reported 2018 results with 2017 given ASC 606 adoption and its material timing and classification effects.