Groupon, Inc. — FY 2018 Form 10-K
Business context and reporting period. Groupon operates online local-commerce marketplaces in North America and internationally across Local, Goods and Travel. This 10-K covers the fiscal year ended December 31, 2018; figures below compare with FY 2017 unless noted. Groupon reports service revenue primarily net of merchants’ shares, while direct merchandise revenue is reported gross.
Financial and operating performance
- Revenue: $2.637 billion, down 7.3%. Service revenue fell 4.8% to $1.205 billion; product revenue fell 9.3% to $1.431 billion.
- Gross profit and margins: $1.321 billion, down 1.0%; gross margin was approximately 50.1%, up from 46.9%. Operating income increased to $54.0 million from $29.4 million; operating margin was approximately 2.0%.
- Net income: Continuing-operations income was $2.0 million versus $28.6 million. After $13.1 million attributable to noncontrolling interests, Groupon reported a net loss attributable to Groupon, Inc. of $11.1 million, or $0.02 per share, compared with net income of $14.0 million, or $0.03 per share.
- Adjusted EBITDA: $269.8 million, up from $249.9 million. This is a non-GAAP measure.
- Cash flow: Operating cash flow from continuing operations was $190.9 million, compared with $130.5 million; free cash flow, a non-GAAP measure, was $121.2 million versus $71.4 million. Investing activities used $136.0 million and financing activities used $84.4 million.
- Cash and liquidity: Cash and cash equivalents were $841.0 million at year-end, down from $880.1 million. Working capital was positive $41.5 million, compared with a $61.1 million deficit.
- Debt: Convertible notes had $250.0 million principal and $201.7 million net carrying value, bearing 3.25% interest and maturing in April 2022. The $250.0 million revolving credit facility had no borrowings and matures in June 2019; Groupon said it intended to refinance in the first half of 2019.
- Marketplace metrics: Gross billings declined 7.8% to $5.203 billion; active customers fell to 48.2 million from 49.5 million; units sold fell 8.8% to 172.3 million. Gross profit per active customer rose to $27.42 from $26.93.
Material changes versus prior period
- North America revenue declined 14.4% to $1.639 billion, while International revenue rose 7.3% to $997.4 million. International gross profit increased 5.8%; North America gross profit declined 4.0%.
- Management attributed weaker North America billings to lower organic traffic, lower Goods volume, and shifting food-and-drink offers toward voucherless cash-back products. International growth reflected foreign exchange, transaction volume and digital coupons, including the Cloud Savings acquisition.
- Marketing expense decreased 1.3% to $395.7 million, while SG&A fell 3.4% to $871.0 million. Results included a $34.6 million IBM litigation charge and a $10.2 million impairment of investments.
- FY 2018 included adoption of ASC Topic 606 under the modified retrospective method. The standard materially changed opening accumulated deficit and affected revenue, costs and timing of recognition; the company reported a net $88.9 million reduction to opening accumulated deficit. Prior-year income statement figures were not restated.
- Fourth quarter: Revenue was $799.9 million versus $873.2 million in Q4 2017; gross profit was $366.1 million versus $386.9 million. Operating income was $61.9 million versus $49.7 million. Net income attributable to Groupon was $46.2 million versus $47.7 million.
Outlook, commentary and risks
- Management emphasized long-term gross-profit growth, improved customer experience, broader merchant inventory, international investment and operating efficiency. No specific consolidated revenue or earnings guidance was provided in the supplied filing text.
- Management expected North American active customers to continue declining in 2019 amid traffic declines and a focus on higher-value customers; it also expected unit declines to continue. It anticipated that Topic 606’s treatment of unredeemed vouchers could further increase North America gross profit in 2019.
- Scaling card-linked cash-back offers may initially pressure cash flow because Groupon pays incentives before collecting from merchants; a larger share of these offers may also reduce reported gross billings. Management noted that the offers’ success and scalability are uncertain.
- The revolving credit agreement’s June 2019 maturity creates a refinancing milestone. Groupon reported compliance with its covenants and no borrowings at year-end.
- IBM litigation was settled for $57.5 million, with $34.6 million recorded as expense and $15.4 million capitalized for a patent license. The settlement resolved the related cases.
- Key exposures include declining customer traffic and purchase frequency, merchant terms and retention, competition, cybersecurity, refund and voucher breakage estimates, foreign exchange, international regulation and Brexit uncertainty. A foreign tax authority proposed a $109.6 million assessment, primarily relating to 2011 transfer pricing; Groupon said it believes the assessment is without merit and intends to contest it.
Most important facts for investors to verify
- Whether customer, unit and North America gross-billings declines stabilized after 2018, and whether gross profit per customer gains can offset shrinking activity.
- Whether voucherless offers and digital coupons scale profitably, including their effect on reported gross billings, margins and working capital.
- Completion and terms of refinancing the $250 million revolving facility before its June 2019 maturity.
- Cash conversion and liquidity trends, including merchant and supplier payment timing and the cash impact of buybacks and acquisitions.
- Updates on the $109.6 million tax assessment, unredeemed-voucher liabilities and other legal or regulatory contingencies.
- The sustainability of reported profitability given the IBM settlement, investment impairments, Topic 606 effects and non-GAAP adjustments.