Groupon, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Groupon operates a two-sided marketplace connecting consumers with merchants, across North America and International segments. Its revenue comprises net commissions and other service revenue, plus gross-basis product revenue from Goods.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $2.219 billion | $2.637 billion |
| Gross profit | $1.186 billion | $1.321 billion |
| Gross margin | 53.5% | 50.1% |
| Operating income | $39.8 million | $54.0 million |
| Continuing-operations net income (loss) | $(14.3) million | $2.0 million |
| Net income (loss) attributable to Groupon | $(22.4) million | $(11.1) million |
| Adjusted EBITDA (non-GAAP) | $227.2 million | $269.8 million |
| Cash from continuing operations | $71.3 million | $190.9 million |
| Free cash flow (non-GAAP) | $4.0 million | $121.2 million |
- Fourth-quarter 2019 revenue was $612.3 million versus $799.9 million a year earlier. Operating income was $40.1 million versus $61.9 million; continuing-operations income was $79.2 million versus $49.9 million. Quarterly figures are unaudited.
- Cash and cash equivalents were $750.9 million at year-end, down from $841.0 million. Working capital was positive $66.4 million. Current assets were $887.9 million and current liabilities were $821.5 million.
- The $250.0 million principal amount of 3.25% convertible notes due April 2022 had a $214.9 million net carrying value. No amounts were drawn under the $400 million revolving credit facility, which matures in May 2024; the company reported compliance with its covenants.
Changes versus the prior year
- Revenue fell 15.8%; service revenue declined 6.6% and product revenue declined 23.7%. Gross profit decreased 10.2%, although gross margin improved, reflecting the changing revenue mix and lower product costs.
- Gross billings declined 11.3%, units fell 12.4%, and trailing-twelve-month active customers decreased from 48.2 million to 43.6 million. Management cited lower traffic, including email and search, and more efficient marketing spend.
- North America revenue declined 17.1%, while operating income increased to $65.7 million from $19.9 million, partly because marketing and SG&A costs fell and 2018 included a $34.6 million IBM patent-litigation charge. International revenue fell 13.8% and the segment moved from $34.1 million operating income to a $25.9 million operating loss, amid weak European consumer sentiment, competition, unfavorable currency effects, and lower-margin offer mix.
- Operating cash flow and free cash flow fell substantially year over year. Management attributed the operating cash-flow decline in part to lower billings and working-capital movements, including accrued merchant and supplier payables.
Strategy, outlook, risks, and unusual items
- In February 2020, Groupon announced plans to exit Goods by the end of 2020 and focus on Local and Travel. Priorities include building high-quality local inventory, modernizing customer and merchant tools, repositioning the brand, and reducing costs. The company expects Goods results ultimately to be presented as discontinued operations.
- Management expected active-customer declines to continue in 2020 and anticipated a one-time working-capital decrease related to the Goods exit. It said cash and expected operating cash flows should cover working capital and capital expenditures for at least the next 12 months, while cautioning that the exit could affect liquidity and credit availability.
- Execution risks include exit costs, employee disruption, and potentially protracted consultation with international workers’ councils. Management also planned a brand relaunch in the second half of 2020 and a next-generation mobile app in the second quarter; marketing payback targets were approximately 12–18 months.
- Other material risks include declining organic traffic and customer engagement, merchant retention and competition, foreign-exchange exposure, cybersecurity, refund and unredeemed-voucher estimates, and changing consumer, privacy, tax, and voucher regulations.
- Other income and expense was a net expense of $53.3 million. It included a $69.4 million fair-value loss on the Monster Holdings LP investment, whose year-end fair value was zero, partly offset by a $51.4 million observable-price increase in another equity investment. These investment valuations rely on significant estimates and can cause earnings volatility.
- Groupon disclosed a proposed foreign tax assessment of $113.3 million, including estimated interest, primarily relating to 2011 transfer pricing. The company considers it without merit and intends to contest it. It also reported $30.1 million of non-current unrecognized tax-benefit liabilities, excluding the assessment.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The filing identifies the foreign tax position, Monster LP valuation, and goodwill assessment as critical audit matters; no goodwill impairment was recorded for 2019.
Investor facts to verify
- Whether the Goods exit is completed on schedule, its total costs, and its effects on working capital, liquidity, and remaining customer activity.
- Whether customer, unit, and Local-category trends stabilize, and whether planned product and marketing investments improve engagement and profitability.
- Cash-flow generation and liquidity against the credit facility’s covenants, lease obligations, and the 2022 convertible-note maturity.
- Developments in the $113.3 million proposed tax assessment and other tax audits or unrecognized tax exposures.
- Subsequent realizations and valuation assumptions for the investment portfolio, including the January 2020 sale of half of another equity investment for $34.0 million.