Groupon, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Groupon operates online local-commerce marketplaces across North America, EMEA, and Rest of World, offering Local, Goods, and Travel deals. Financial statements are unaudited.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $757.1 million | $595.1 million | $2,266.3 million | $1,805.2 million |
| Gross profit | $380.1 million | $359.6 million | $1,155.7 million | $1,123.3 million |
| Gross margin | 50.2% | 60.4% | 51.0% | 62.2% |
| Operating income (loss) | $(5.4) million | $13.8 million | $(33.2) million | $62.4 million |
| Net income (loss) attributable to Groupon | $(21.2) million | $(2.6) million | $(81.9) million | $(14.1) million |
| Adjusted EBITDA (non-GAAP) | $67.0 million | $62.3 million | $166.3 million | $214.7 million |
| Operating cash flow | $45.5 million | $(11.9) million | $2.0 million | $40.2 million |
| Free cash flow (non-GAAP) | $25.4 million | $(27.0) million | $(65.5) million | $(3.4) million |
Q3 gross billings were $1.86 billion, up from $1.34 billion; nine-month gross billings were $5.50 billion, up from $4.16 billion. Active customers for the trailing twelve months reached 52.8 million, versus 42.6 million, and units purchased rose to 88.2 million in Q3 from 45.9 million.
Balance sheet, liquidity, and cash use
- At September 30, cash and cash equivalents were $855.2 million, down from $1.24 billion at year-end 2013. Current assets were $1.25 billion and current liabilities were $1.18 billion.
- Groupon reported no borrowings under its new $250 million, three-year senior secured revolving credit facility and was in compliance with its covenants. The facility requires at least $400 million of unrestricted cash, including $200 million held with lenders or affiliates. Capital lease obligations were $14.3 million.
- Nine-month investing cash outflow was $193.6 million, including $117.3 million net cash paid for acquisitions and $67.5 million for property, equipment, and capitalized software. Financing cash outflow was $173.1 million, primarily reflecting $145.4 million of treasury-stock purchases.
- Groupon said available cash and expected operating cash flows should meet working-capital and capital-expenditure needs for at least the next 12 months, while noting this is not assured. It expected operating cash flow to remain positive in annual periods for the foreseeable future.
Material changes and operating trends
- Q3 revenue increased 27.2%, but the increase was driven predominantly by direct Goods sales, which are reported gross and carry lower margins. Direct revenue rose to $357.3 million from $200.1 million; third-party revenue was nearly flat at $393.0 million versus $390.8 million.
- For the first nine months, direct revenue rose to $1.03 billion from $552.2 million, while third-party revenue declined to $1.21 billion from $1.24 billion. Groupon attributed weaker third-party revenue in part to lower retained deal margins, including lower-margin Ticket Monster transactions.
- Gross margin contracted in both periods as Goods/direct sales became a larger share of revenue. Management reported direct-revenue gross margins of 11.7% for Q3 and 10.2% for the nine-month period, compared with 9.3% and 9.0%, respectively, a year earlier. Third-party gross profit declined year over year for both periods.
- Operating results weakened despite higher gross profit: nine-month operating expenses rose, including marketing expense to $203.1 million from $158.3 million and SG&A to $983.8 million from $904.9 million. Segment operating income (excluding stock compensation and acquisition-related items) declined year over year in North America and EMEA; Rest of World operating loss widened.
- Ticket Monster and Ideel were acquired in January 2014 for aggregate consideration of $259.4 million and $42.7 million, respectively. Ticket Monster contributed $42.8 million of Q3 revenue and $107.4 million for the nine months, and reported losses of $6.4 million and $30.3 million, respectively.
Outlook, commentary, risks, and unusual items
- No specific revenue, earnings, or margin guidance was provided. Management described continued investment in technology, operations, marketing, and marketplace expansion, and said it was exploring financing and strategic alternatives for Ticket Monster and certain other Rest of World markets; no transaction was assured or on a set timetable.
- Q3 other expense was $20.0 million, primarily $18.6 million of foreign-currency transaction losses on intercompany balances and $1.4 million of investment impairments. Nine-month foreign-currency losses were $20.1 million. Groupon also recorded a $7.7 million reduction in uncertain-tax-position liabilities; up to $35.5 million of additional changes in unrecognized tax benefits were considered reasonably possible within 12 months.
- Key business risks include competitive pressure, merchant retention and deal economics, lower-margin Goods growth, inventory and fulfillment execution, customer refunds, international operations and foreign-exchange exposure, and cybersecurity or service interruptions. Management noted that Goods growth may increase reported revenue without comparable growth in profit or cash flow.
- Pending matters include securities and derivative litigation related to previously revised 2011 results and internal-control deficiencies, consumer and gift-card/coupon claims, and intellectual-property disputes. A court certified the securities class action in September 2014; Groupon petitioned to appeal. The company could not reasonably estimate reasonably possible losses above accruals for the securities and derivative lawsuits.
- Management concluded disclosure controls were effective as of September 30, 2014 and reported no material change in internal control over financial reporting during the quarter. Groupon had an accumulated deficit of $930.7 million.
Important facts for investors to verify
- Whether revenue growth from direct Goods transactions can translate into sustained gross profit, operating income, and cash generation as the sales mix changes.
- How much reported growth reflects acquisitions, especially Ticket Monster, and whether acquired operations can improve profitability.
- Whether the fall in cash and negative nine-month free cash flow, alongside acquisitions, capital spending, and repurchases, remains consistent with management’s liquidity expectations and credit-facility covenants.
- Progress and outcomes in the securities class-action appeal, gift-card/coupon proceedings, and tax audits, including potential financial exposure not currently estimable.
- Any decisions or developments regarding strategic alternatives for Ticket Monster and other Rest of World markets, and the effect of foreign-exchange movements on results.