Groupon, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
Groupon operates online local-commerce marketplaces in 15 countries through North America and International segments. It earns service revenue primarily from merchant commissions and product revenue from direct merchandise sales. Management says it is prioritizing long-term gross profit growth, customer experience, marketplace expansion, international performance, and operating efficiency.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $495.6 | $592.9 | $1,606.6 | $1,836.8 |
| Gross profit | $277.9 | $306.0 | $876.1 | $954.5 |
| Gross margin | 56.1% | 51.6% | 54.5% | 52.0% |
| Operating income (loss) | $4.6 | $53.0 | $(0.3) | $(7.8) |
| Net income (loss) attributable to Groupon | $(16.7) | $44.6 | $(99.4) | $(57.3) |
| Adjusted EBITDA | $50.0 | $56.4 | $143.5 | $165.2 |
| Free cash flow | $0.9 | $(73.5) | $(182.0) | $(186.6) |
Q3 revenue declined 16.4% year over year, while gross profit fell 9.2%. For the first nine months, revenue declined 12.5% and gross profit fell 8.2%. The reported Q3 2018 comparison included a $40.4 million benefit from settling IBM patent litigation; nine-month 2018 results included a $34.6 million IBM-related charge.
Q3 operating cash flow was $18.6 million, compared with an outflow of $57.4 million in Q3 2018. For the nine months, operating cash outflow was $130.1 million versus $133.0 million. Nine-month free cash flow remained negative, reflecting operating cash use and $51.9 million of property, equipment, and capitalized software purchases.
At September 30, 2019, cash and cash equivalents were $567.3 million, down from $841.0 million at December 31, 2018. Current assets were $705.0 million and current liabilities $688.8 million. Convertible notes had a $250.0 million principal amount and $211.4 million net carrying value, maturing April 2022. The $400 million revolving credit facility, due May 2024, had no borrowings; $18.0 million of letters of credit were outstanding. The company reported compliance with its covenants. Operating lease obligations were $149.9 million, including $31.5 million current.
Material changes versus the prior comparable period
- Revenue and gross billings declined across both segments. Q3 gross billings fell 10.1%, to $1.09 billion; nine-month gross billings fell 10.2%, to $3.39 billion.
- Management attributed lower volume chiefly to fewer customers and lower traffic, including email and search-engine-optimization traffic. Units sold decreased 9.4% in Q3 and 11.1% for the nine-month period.
- Trailing-12-month active customers declined to 45.3 million from 48.8 million. Gross profit per active customer was approximately unchanged at $27.45 versus $27.51.
- Q3 North America revenue declined 15.9% and International revenue declined 17.1%. International results were affected by weak European consumer sentiment, especially in the U.K., competition in Goods, mix shifts, and currency movements.
- Other expense was $17.3 million in Q3 and $92.6 million for the nine months. The nine-month amount included a $69.0 million loss on fair-value investments, primarily the Monster LP investment, whose reported value fell from $69.4 million at year-end 2018 to zero. Management cited TMON underperformance, revised forecasts, and increased investment risk.
- Groupon adopted lease accounting Topic 842 on January 1, 2019, recognizing $109.6 million of additional lease assets and liabilities at adoption. Prior-period balance-sheet amounts were not adjusted.
Outlook, management commentary, risks and contingencies
- Management expects North America active-customer declines to continue through 2019 and, to some extent, into 2020, citing ongoing traffic declines. It expected sequential improvement in year-over-year unit trends during the remainder of 2019; the filing provides no specific revenue or earnings guidance.
- Management said strategic initiatives—including card-linked cash-back offers, booking capabilities, and Groupon Select—may pressure near-term gross profit and operating income as the company builds awareness and merchant supply. Some cash-back models have less favorable working-capital timing than voucher transactions.
- The company stated that cash, operating cash generation, and available credit should be sufficient for working capital and capital expenditure needs for at least the next 12 months. Cash flow is seasonal, and the filing notes that holiday-season inflows are typically followed by supplier-payment outflows.
- Foreign exchange is a material exposure: international operations generated about 38.7% of revenue. Currency changes reduced nine-month revenue by $39.2 million and gross profit by $17.2 million versus prior-year exchange rates. Q3 also included $12.8 million of foreign-currency losses in other expense.
- Groupon is defending a proposed $105.6 million foreign tax assessment, which it says is without merit. It also faces various intellectual-property, consumer-protection, privacy, employment, and other legal or regulatory matters. Management said reasonably possible losses above accrued amounts were not expected to be material, while acknowledging uncertainty.
- The company had $3.2 million of remaining indemnification liabilities related to its Latin America disposition and estimated approximately $13.3 million of reasonably possible additional exposure under those indemnifications.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether customer traffic, active customers, and units stabilize as management anticipated, and whether gross profit and Adjusted EBITDA trends improve.
- Whether International performance—particularly in the U.K. and Goods—recovers, and how currency movements affect reported results.
- Whether Monster LP’s write-down to zero is final and whether other investments or estimates create further earnings volatility.
- The status and potential financial impact of the $105.6 million tax assessment, other legal matters, and indemnification exposures.
- Cash conversion and liquidity through seasonal supplier-payment cycles; covenant headroom under the credit agreement; and the implications of lease and convertible-note obligations.
- The execution and economics of new customer and merchant initiatives, including their effects on margins, working capital, customer retention, and share dilution.