Groupon, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. Groupon operates a local-commerce marketplace through North America and International segments, connecting consumers with discounted merchant offers and also selling goods as merchant of record.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $568.6 million | $430.2 million | $1,696.2 million | $1,118.3 million |
| Operating income (loss) | $25.4 million | $(0.2) million | $111.6 million | $(218.4) million |
| Net income (loss) | $(0.9) million | $(14.4) million | $29.0 million | $(238.1) million |
| Net income (loss) attributable to Groupon | $(1.6) million | $(10.6) million | $26.2 million | $(214.5) million |
| Cash from operating activities | Not presented separately for the quarter | Not presented separately for the quarter | $201.1 million | $121.4 million |
- Q3 revenue increased 32% year over year; nine-month revenue increased 52%. Q3 gross billings rose 5.3% to $1.218 billion, while nine-month gross billings rose 40.1% to $3.860 billion.
- Direct revenue, primarily Goods sales recorded gross, grew to $145.0 million in Q3 from $7.2 million and to $229.6 million for the first nine months from $7.2 million. Q3 third-party revenue was $417.2 million, down from $422.1 million.
- Calculated gross margin was approximately 68.0% in Q3 and 74.3% for the first nine months, based on reported revenue less cost of revenue. Direct sales carry product costs and are recorded gross, affecting comparability of margins and revenue growth.
- Reported operating margin was approximately 4.5% in Q3 and 6.6% for the first nine months. Management’s non-GAAP operating income excluding stock compensation and acquisition-related items was $50.5 million in Q3 and $190.0 million year to date.
- Nine-month free cash flow, defined by Groupon as operating cash flow less property, equipment and capitalized software purchases, was $145.3 million, up from $91.5 million. Investing cash outflow was $142.2 million; financing cash inflow was $18.6 million.
- Cash and cash equivalents were $1.201 billion at September 30, 2012, versus $1.123 billion at December 31, 2011. Current assets were $1.432 billion and current liabilities $1.125 billion, yielding working capital of about $307 million. Groupon reported no long-term borrowings.
- Total liabilities were $1.228 billion, including $573.5 million in accrued merchant payables. Merchant payment timing and any acceleration of payments can affect operating cash flow.
Material changes and unusual items
- Q3 included a one-time $18.5 million increase in third-party revenue from recognizing expired, unredeemed German Groupons sooner following a German tax ruling. This is not indicative of recurring deal revenue.
- Nine-month interest and other income included a $56.0 million pretax gain on the E-Commerce transaction. Groupon exchanged its E-Commerce interest and additional cash for a 19% interest in Life Media (F-tuan); the investment was carried at $128.1 million, with estimated fair value of $124.9 million at quarter-end.
- The nine-month income tax provision was $128.3 million on $157.3 million of pretax income, an 81.6% effective rate. Q3’s rate was 103.6%. Management attributed elevated rates in part to losses in jurisdictions where tax benefits were unavailable and amortization of taxes paid on a prior intellectual-property sale.
- Stock-based compensation was $77.7 million for the first nine months, compared with $60.9 million a year earlier. SG&A rose to $871.5 million from $565.7 million, primarily due to sales-force, technology and infrastructure expansion. Marketing fell to $275.9 million from $613.2 million as spending shifted from subscriber acquisition toward customer activation.
- Revenue mix shifted toward North America: it represented 51.3% of Q3 revenue and 46.6% year to date, versus 37.5% and 40.7%, respectively, in the comparable 2011 periods. Management cited weaker European performance and slower international growth.
Outlook, risks and controls
- No quantified revenue or earnings guidance is provided. Management planned continued investment in technology, products, marketing, sales capacity and strategic acquisitions, and expected direct revenue and the Goods category to continue growing. It said available cash and expected operating cash generation should meet working-capital and capital-expenditure needs for the next 12 months, while cautioning that this was not assured.
- Management expected operating cash flow to remain positive in the foreseeable future, but noted that more favorable or accelerated merchant payment terms could reduce cash-flow benefits. It also expects substantial investment and acknowledged that future losses remain possible.
- Key business risks include intense competition, merchant and customer retention, uncertain international execution—particularly in Europe—refund estimates, Goods inventory and fulfillment exposure, foreign exchange, and regulation of coupons, gift cards, payments, privacy and taxes.
- Management reported disclosure controls were ineffective at the reasonable-assurance level because of an unremediated material weakness in the financial-statement close process, including account reconciliations and review of estimates such as refund reserves. Remediation was underway; management could not assure effectiveness by year-end 2012.
- The filing describes securities class actions and shareholder derivative suits following the March 2012 revision of 2011 results, as well as other legal and regulatory matters. Groupon said it intended to defend the cases and did not then expect the described matters to have a material adverse effect, while acknowledging litigation costs and uncertainty.
- Goodwill impairment testing for EMEA and LATAM required a second-step analysis because of negative book values and other factors, including European conditions and market-capitalization decline. Testing was in progress; management did not then anticipate an impairment.
Important facts for investors to verify
- Whether operating performance remains positive after excluding the $18.5 million German revenue item and the $56.0 million investment-related gain, and how direct-sales growth affects margins and cash conversion.
- Whether Groupon remediates the material weakness and whether its year-end financial-control assessment and auditor attestation identify further issues.
- Trends in European revenue and gross billings, customer and merchant retention, refund rates, and the economics of the Goods category.
- Cash-flow sensitivity to merchant payment terms, accrued merchant payables, tax payments and ongoing investment requirements.
- Developments in the securities and derivative litigation, gift-card and unclaimed-property claims, tax matters, and the EMEA/LATAM goodwill impairment review.