Groupon, Inc. — Q2 2014 Form 10-Q
Business context and period. Groupon operates online local-commerce marketplaces offering discounted goods and services. This unaudited report covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Results include Ticket Monster from January 2 and Ideeli from January 13, 2014.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $751.6 million | $608.7 million | $1,509.2 million | $1,210.1 million |
| Gross profit | $389.9 million | $384.7 million | $775.6 million | $763.7 million |
| Gross margin | 51.9% | 63.2% | 51.4% | 63.1% |
| Operating income (loss) | $(7.9) million | $27.4 million | $(27.8) million | $48.6 million |
| Net income (loss) | $(20.9) million | $(5.6) million | $(56.3) million | $(8.8) million |
| Net loss attributable to Groupon, Inc. | $(22.9) million | $(7.6) million | $(60.7) million | $(11.6) million |
| Adjusted EBITDA | $59.1 million | $80.5 million | $99.4 million | $152.4 million |
| Free cash flow | $(53.8) million | $29.3 million | $(90.9) million | $23.6 million |
Q2 revenue rose 23.5%, but gross profit increased only 1.3%; operating results shifted to a loss. Six-month revenue increased 24.7%, while the company moved from operating income to an operating loss. Adjusted EBITDA declined in both comparisons.
Revenue mix and margins. Direct revenue, primarily Groupon Goods sales where Groupon acts as merchant of record, increased to $345.6 million in Q2 from $189.9 million; third-party and other revenue declined to $405.9 million from $418.9 million. Goods represented 53.6% of Q2 revenue versus 39.7% a year earlier. Management attributed the lower consolidated gross margin mainly to the larger share of lower-margin direct Goods revenue and its gross-basis presentation. Direct-revenue gross margin was 12.2% in Q2 and 9.4% for the first half. The company also reported lower merchant take rates on several third-party categories, including Local.
Segments. Q2 revenue was $423.9 million in North America, $227.7 million in EMEA and $100.0 million in Rest of World. Segment operating income (excluding stock compensation and acquisition-related items) was $14.5 million, $27.7 million and a $17.9 million loss, respectively. Ticket Monster materially increased Rest of World activity; it contributed $317.0 million in Q2 gross billings and $35.4 million in revenue.
Cash, liquidity and capital
- Cash and cash equivalents were $868.1 million at June 30, down from $1,240.5 million at December 31, 2013. Cash included approximately $326.4 million held outside the United States.
- First-half operating cash flow was negative $43.5 million, versus positive $52.1 million in 2013. Free cash flow was negative $90.9 million, reflecting weaker operating cash flow and higher capital spending.
- First-half investing cash outflow was $173.1 million, including $120.7 million net cash paid for acquisitions and $47.4 million for property, equipment and capitalized software. Financing cash outflow was $156.2 million, primarily reflecting $135.5 million of share repurchases.
- Current liabilities were $1.245 billion against current assets of $1.269 billion. Accrued merchant and supplier payables were $803.4 million. The filing reports $8.9 million of long-term capital-lease obligations; it reports no other outstanding borrowings at quarter-end.
- On August 1, 2014, after quarter-end, Groupon entered a three-year senior secured revolving credit agreement for up to $250 million. No borrowings were outstanding as of the filing. The agreement includes financial and operating covenants and requires at least $400 million in unrestricted cash, including $200 million at lenders or affiliates.
Changes, outlook and notable items
- Ticket Monster was acquired for $259.4 million, partly funded with 13.8 million Groupon shares; Ideeli was acquired for $42.7 million in cash. Four businesses were acquired in the first half overall. Acquisitions increased goodwill and intangible assets; goodwill rose to $461.0 million from $220.8 million at year-end.
- Management said the shift toward ongoing marketplace offers reduces some cash-flow benefits from the timing of customer receipts and merchant payments. The first-half operating cash outflow also reflected working-capital changes, including lower merchant and supplier payables. Management expected operating cash flow to be positive in annual periods for the foreseeable future, while cautioning that it could provide no assurance.
- Management planned continued investment in technology, sales and marketing, acquisitions and strategic investments. It described the Gnome merchant tablet and Pages local-business content initiatives, but did not expect either to produce material near-term revenue. The filing provides no specific revenue or earnings guidance.
- Share repurchases totaled $135.5 million in the first half; $118.0 million remained under the $300 million authorization at June 30, 2014. Management said the program could be suspended or discontinued.
- Key risks include Goods’ lower margins, inventory and fulfillment costs, pressure on merchant take rates, competition, customer and merchant retention, international execution and foreign-currency exposure. Groupon cited pending securities and derivative litigation, consumer and gift-card-related claims, intellectual-property disputes and regulatory matters; it could not reasonably estimate reasonably possible losses above accruals for the securities and derivative cases. Tax audits could result in a change of up to $48 million in unrecognized tax benefits within 12 months.
- The effective tax rate was unusually high and negative in relation to pretax losses: tax expense was $12.0 million in Q2 and $26.6 million in the first half. Management cited losses in jurisdictions where tax benefits could not be recognized, intercompany intellectual-property tax effects and nondeductible stock compensation.
- Management reported disclosure controls were effective as of June 30 and no material change in internal control over financial reporting during the quarter. A new revenue-recognition standard had been issued; management was assessing its impact.
Most important facts for investors to verify
- Whether revenue growth from direct Goods sales can translate into durable gross profit, operating income and cash generation despite lower margins.
- Whether merchant take rates and Local-category performance stabilize, and whether the acquired businesses deliver expected strategic and financial benefits.
- Whether operating cash flow recovers as working-capital timing changes, and how acquisitions, capital spending and repurchases affect cash balances.
- The terms, covenant headroom and potential practical effect of the post-quarter secured revolver, including its minimum-cash requirements.
- Developments in material litigation, gift-card and consumer regulation, tax audits and the potential exposure beyond recorded accruals.