Groupon, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone Q4 filing; fourth-quarter results are included below where disclosed. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Groupon operates online marketplaces connecting consumers with merchants through discounted Local, Goods and Travel offers. It earns net third-party revenue when acting as a marketing agent, and gross direct revenue when it acts as merchant of record, primarily for Goods. Operations are reported in North America, EMEA, and Rest of World. Strategy emphasizes mobile commerce, searchable marketplaces, deal breadth and merchant tools.
Active customers rose to 44.9 million from 41.0 million; units sold increased to 193.4 million from 176.1 million. However, trailing-twelve-month gross billings per average active customer declined to $134.01 from $143.88. Nearly 50% of global transactions were completed on mobile devices in December 2013.
Key financial results
| Metric | FY 2013 | FY 2012 | Change / context |
|---|---|---|---|
| Gross billings | $5,757.3 million | $5,380.2 million | Up 7.0% |
| Revenue | $2,573.7 million | $2,334.5 million | Up 10.2% |
| Gross profit | $1,501.5 million | $1,615.5 million | Down 7.1% |
| Gross margin | 58.3% | 69.2% | Lower, chiefly reflecting growth in lower-margin direct Goods revenue |
| Operating income | $75.8 million | $98.7 million | Down 23.2% |
| Net loss | $(88.9) million | $(51.0) million | 2013 included a major investment impairment |
| Adjusted EBITDA | $286.7 million | $259.5 million | Non-GAAP; up 10.5% |
| Cash from operating activities | $218.4 million | $266.8 million | Down $48.4 million |
| Free cash flow | $154.9 million | $171.0 million | Non-GAAP; down $16.1 million |
Direct revenue increased to $919.0 million from $454.7 million, while third-party revenue declined to $1,641.0 million from $1,859.3 million. Direct Goods revenue is reported gross, with related inventory, shipping and fulfillment costs also recorded; its gross margin was 8.6%, compared with 7.4% in 2012. Third-party deal margins also fell in several categories as Groupon accepted less of billings to attract merchants and broaden its offers.
North America revenue rose to $1,521.4 million from $1,165.7 million. EMEA revenue declined to $742.9 million from $805.5 million, and Rest of World revenue declined to $309.4 million from $363.3 million. Rest of World reported a segment operating loss of $54.9 million, versus a loss of $42.0 million. Segment operating results exclude stock-based compensation and acquisition-related items.
Liquidity, debt and cash flow
At December 31, 2013, cash and cash equivalents were $1,240.5 million, working capital was $374.7 million, and total assets were $2,042.0 million. Total liabilities were $1,330.3 million. Groupon reported no significant long-term borrowings; long-term capital lease obligations were $5.7 million. Accrued merchant and supplier payables were $752.9 million, up from $671.3 million.
Operating cash flow included an $88.5 million benefit from increased merchant and supplier payables, mainly related to seasonal Goods sales. Fourth-quarter operating cash flow was $178.3 million, or 81.6% of the full-year amount. Management expected cash flow to decrease significantly and potentially be negative in Q1 2014 as it paid suppliers for holiday inventory. Cash and cash equivalents included approximately $432.7 million held outside the United States.
Material changes, outlook and unusual items
- Other expense included an $85.5 million impairment of Groupon’s F-tuan investment, valued at zero at year-end after F-tuan’s major shareholder stopped providing support. Groupon said F-tuan needed additional financing and that there was substantial doubt about its ability to continue as a going concern. The 2012 comparison included a $56.0 million gain on the E-Commerce transaction and a $50.6 million F-tuan impairment.
- In January 2014, Groupon acquired Ticket Monster for $100.0 million cash and 13.8 million Class A shares valued at $162.9 million, and acquired Ideeli for $43.0 million cash. Management expected these acquisitions to increase both 2014 revenue and net loss, with additional near-term integration and marketing costs.
- Management expected direct Goods revenue to continue growing and said it would expand direct-revenue Goods deals internationally. It also expected Rest of World revenue and marketing costs to rise with Ticket Monster. No specific full-year 2014 revenue or earnings guidance is provided in the filing.
- Risks highlighted include intense competition and pressure on deal margins; customer and merchant retention; lower-margin Goods growth and inventory/fulfillment execution; international operating and currency exposure; refund estimation; cybersecurity (including a 2013 breach of a Taiwan subscriber database); and evolving rules governing vouchers, gift cards, privacy, payments and taxes.
- Groupon disclosed securities and derivative litigation related to prior financial reporting, consumer and intellectual-property cases, and purported class actions alleging violations of gift-card laws. The filing states that reasonably possible losses above accrued amounts were not expected to have a material adverse effect based on information then available, while noting litigation uncertainty.
Most important facts for investors to verify
- Whether revenue growth from direct Goods sales translates into improved gross profit and operating income, given lower margins and fulfillment costs.
- Whether the declines in EMEA and Rest of World, and the falling billings per active customer, stabilize or continue.
- How much operating cash flow depends on timing of merchant and supplier payments, and whether the anticipated Q1 2014 cash-flow weakness materialized.
- Integration costs, performance and dilution from Ticket Monster and Ideeli, and the funding outlook for F-tuan.
- Potential exposure from refund estimates, voucher/gift-card regulation, tax audits and litigation; the filing reports $109.3 million of non-current unrecognized tax benefits, including interest and penalties.
- Capital allocation: Groupon repurchased $46.6 million of shares in 2013 under a $300 million authorization through August 2015. The filing reports no dividend plans for the foreseeable future.