Groupon, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Groupon operates online marketplaces connecting consumers with merchants, in North America and internationally. The company said COVID-19 disruptions affected operations and delayed this filing.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $374.2 million | $578.4 million |
| Gross profit | $201.2 million | $306.0 million |
| Gross margin | 53.8% | 52.9% |
| Operating income (loss) | $(197.9) million | $2.2 million |
| Net loss attributable to Groupon | $(213.5) million; $(7.53) per diluted share | $(42.5) million; $(1.49) per diluted share |
| Adjusted EBITDA (non-GAAP) | $(22.5) million | $47.0 million |
| Cash from operating activities | $(236.4) million | $(147.5) million |
| Free cash flow (non-GAAP) | $(247.0) million | $(165.0) million |
Revenue comprised $207.0 million of service revenue and $167.1 million of product revenue. Cash and cash equivalents were $666.9 million at quarter-end, down from $750.9 million at December 31, 2019. Current liabilities were $729.2 million versus current assets of $779.4 million. The company had $150.0 million drawn under its $400.0 million revolving credit facility, plus $18.9 million of letters of credit; it also had $250.0 million principal amount of convertible notes due in April 2022 (carrying value $218.4 million). Groupon borrowed a further $50.0 million under the revolver in April.
Changes versus the prior-year quarter
- Revenue fell 35.3%; gross profit fell 34.2%. Gross margin increased to 53.8% from 52.9%, while operating results deteriorated sharply.
- Service revenue declined 27.6% and product revenue declined 42.9%. Gross billings fell 31.4%, units fell 20.0%, and trailing-twelve-month active customers fell to 41.8 million from 47.2 million.
- Marketing expense decreased to $60.1 million from $93.4 million, but lower demand and traffic weighed on results. The company reported $109.5 million of goodwill impairment and $22.4 million of long-lived asset impairment, both related to International/EMEA operations and recorded amid COVID-19 disruption and a sustained share-price decline.
- Operating cash use increased year over year, with working-capital changes—including seasonal supplier payments and COVID-19 effects—contributing materially. Q1 2020 investing cash flow included $31.6 million in proceeds from an investment sale.
Outlook, management commentary and risks
- Management expected COVID-19 to affect Q2 more significantly than Q1, and anticipated a net loss and negative operating cash flow for full-year 2020. No numerical earnings or revenue guidance was provided in this filing.
- The strategy shifted from exiting Goods to phasing it down and moving toward a third-party marketplace model, with the transition expected to be largely complete in 2021. Management said the model would place fulfillment and returns responsibility on merchants.
- In April, the Board approved restructuring actions expected to affect approximately 1,300 positions globally, with pre-tax charges of up to $105 million. Other cash-preservation measures included staff furloughs, a hiring freeze, reduced marketing, and moving merchants toward redemption-based payment terms.
- Management said cost and cash actions were intended to provide at least 12 months of financial stability, while warning that future COVID-19 impacts were highly uncertain. It stated the company was in compliance with credit-facility covenants at March 31, but deterioration could cause future noncompliance; discussions with lenders regarding covenant relief were ongoing, with no assurance of an amendment or waiver.
- Risks include business closures, lower consumer demand, increased refunds, merchant and customer retention, liquidity and covenant compliance, foreign currency movements, and payment-processor reserve or holdback requirements. A securities class action filed April 28, 2020 alleges misleading statements concerning business prospects and previously reiterated guidance; the company said it intended to defend the claims.
- The filing also describes a proposed foreign tax assessment of $110.8 million, which Groupon disputes, and up to $11.7 million of reasonably possible indemnification obligations above amounts accrued for certain matters. On June 10, 2020, the company effected a 1-for-20 reverse stock split.
Important facts for investors to verify
- Subsequent quarterly filings for the actual impact of COVID-19 on demand, refunds, revenue, cash burn and merchant activity.
- Whether Groupon obtained covenant relief or remained compliant with its revolving-credit agreement, including the effect of additional borrowings.
- Actual restructuring costs, workforce reductions, and progress and economics of the Goods marketplace transition.
- Whether further impairment charges, investment losses, or changes in the disputed tax assessment and legal contingencies arise.
- Reconciliations and definitions of non-GAAP Adjusted EBITDA and free cash flow, and the effects of the reverse stock split on per-share comparisons.