Groupon, Inc. — Q3 2020 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2020; amounts below are in U.S. dollars. Groupon operates a two-sided marketplace in North America and International, across Local, Goods and Travel. The business was significantly affected by COVID-19 restrictions, merchant closures and reduced consumer demand.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $304.0m | $495.6m | $1,073.8m | $1,606.6m |
| Gross profit | $160.0m | $277.9m | $498.5m | $876.1m |
| Gross margin | 52.6% | 56.1% | 46.4% | 54.5% |
| Operating income (loss) | $(16.2)m | $4.6m | $(286.2)m | $(0.3)m |
| Net income (loss) attributable to Groupon | $(16.3)m | $(16.7)m | $(301.9)m | $(99.4)m |
| Adjusted EBITDA | $30.8m | $50.0m | $9.7m | $143.5m |
| Free cash flow | $(7.0)m | $0.9m | $(181.2)m | $(182.0)m |
- Q3 diluted loss per share was $0.57; nine-month diluted loss per share was $10.58, including discontinued operations income of $0.01.
- For the first nine months, operating cash flow was $(144.5)m, investing cash flow $(8.5)m, and financing cash flow $180.6m. Financing included $200.0m drawn under the revolving facility.
- At September 30, cash and cash equivalents were $779.0m (cash, cash equivalents and restricted cash totaled $779.5m). Current assets were $876.4m versus current liabilities of $881.4m.
- Debt included $200.0m of revolving-credit borrowings and $250.0m principal of 3.25% convertible notes due April 2022; the notes’ net carrying amount was $225.7m. The amended revolver has $225.0m capacity and $20.6m of letters of credit outstanding, in addition to borrowings.
Material changes versus prior periods
- Q3 revenue fell 38.7% year over year; nine-month revenue fell 33.2%. Gross billings declined 45.4% in Q3 and 41.4% for the nine-month period. Management attributed the contraction primarily to COVID-19-related demand reductions and restrictions.
- Local and Travel activity weakened sharply. Q3 North America and International revenue declined 40.6% and 35.6%, respectively; both segments also reported lower gross profit. Active customers for the trailing twelve months fell to 34.2m from 45.3m.
- Q3 net loss attributable to Groupon was similar to the prior-year quarter, but operating results moved from $4.6m income to a $16.2m loss. Nine-month losses worsened substantially, including $109.5m goodwill impairment and $22.4m long-lived-asset impairment charges.
- Marketing and SG&A fell year over year, reflecting lower marketing investment, furloughs and restructuring. Nevertheless, SG&A increased as a share of gross profit, from 71.4% to 77.6% in Q3, as revenue and gross profit contracted.
Outlook, management commentary and risks
- Management expected a net loss and negative operating cash flows for full-year 2020. It said available cash, excluding revolver borrowings, and operating cash generation were expected to meet working-capital needs and capital expenditures for at least 12 months, while cautioning that there could be no assurance.
- The strategy shifted toward prioritizing Local inventory and improving merchant and customer experiences. Groupon continued selling Goods while transitioning to a third-party marketplace model, expected to be substantially complete in North America by year-end 2020 and globally in 2021. Management expected Goods revenue presentation to move primarily to net service revenue; it said this presentation change would not affect gross profit or operating income.
- The multi-phase restructuring was expected to incur $75m–$105m of pretax charges through 2021 and, when fully implemented, yield $225m in annualized cost savings. Charges were $61.0m for the first nine months, including workforce reductions and exits from Japan and New Zealand.
- The July 2020 credit amendment provided covenant relief through Q1 2021, but imposed specified minimum EBITDA and liquidity tests during that period; existing financial covenants resume afterward. Borrowing capacity was reduced from $400m to $225m, and interest and commitment-fee rates increased during the suspension period.
- Key uncertainties include the pandemic’s duration and effects on local services, travel, merchant availability and customer redemptions; execution of the Goods transition and cost savings; liquidity and covenant compliance; foreign-exchange movements; and significant estimates used in impairment and voucher revenue accounting.
- Other notable exposures include a proposed foreign tax assessment of $119.1m, which Groupon said it believes is without merit and intends to contest, and a securities class action alleging misleading statements concerning 2019 guidance and Groupon Select. The company stated it intended to defend the lawsuit. It reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How Local demand, gross billings, active customers and merchant participation progressed after September 30, particularly as restrictions changed.
- Whether the Goods marketplace transition met the disclosed timetable and how gross-to-net revenue presentation affects reported revenue trends.
- Realized restructuring cash costs, completion timing and evidence supporting the projected $225m annualized savings.
- Cash burn, working-capital movements, revolver availability and compliance with amended facility liquidity and EBITDA requirements.
- Potential outcomes and financial exposure from the $119.1m tax assessment and pending litigation.
- Future voucher-redemption estimates: revenue constrained on unredeemed vouchers was $41.0m at September 30, compared with $14.6m at year-end 2019.