Groupon, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Groupon operates online local-commerce marketplaces connecting consumers and merchants. Following its strategic review, it completed exits from 11 non-core countries between November 2016 and March 2017. Results for those operations are presented as discontinued operations; continuing operations are reported in North America and International segments.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Gross billings | $1,358 million | $1,370 million | (0.9%) |
| Revenue | $673.6 million | $698.4 million | (3.6%) |
| Gross profit / margin | $309.5 million / 45.9% | $320.1 million / 45.8% | Profit (3.3%) |
| Operating loss | $11.7 million | $45.1 million | Loss narrowed |
| Continuing-operations loss | $20.9 million | $43.5 million | Loss narrowed |
| Net loss attributable to Groupon | $24.4 million | $49.1 million | Loss narrowed |
| Basic and diluted loss per share | $0.04 | $0.08 | Improved |
| Adjusted EBITDA (non-GAAP) | $44.8 million | $31.5 million | Increased |
| Operating cash flow, continuing operations | $(136.2) million | $(74.8) million | Outflow increased |
| Free cash flow (non-GAAP) | $(150.3) million | $(94.6) million | Outflow increased |
Balance sheet and liquidity
- Cash and cash equivalents were $691.0 million at March 31, down from $863.0 million at year-end. Total assets were $1.484 billion and total liabilities $1.272 billion.
- Current assets were $843.2 million versus current liabilities of $992.0 million, a working-capital deficit of about $148.8 million.
- Convertible senior notes had $250 million principal and a $181.6 million net carrying amount; the notes bear 3.25% interest and mature in 2022. Capital lease obligations totaled approximately $42.1 million.
- The $250 million secured revolving credit facility had no borrowings; $10.9 million of letters of credit were outstanding. Groupon reported covenant compliance and at least $400 million minimum unrestricted-cash requirements, including $200 million held with lenders or affiliates.
- Management stated that cash and expected operating cash flows should cover working capital and capital expenditures for at least 12 months, while noting this is not assured.
Material changes and management commentary
- Revenue declined 3.6%, while gross billings declined 0.9%. North America revenue fell 5.5%, largely as the company de-emphasized lower-margin Goods offerings; International revenue rose 1.3%, partly because a greater share of Goods sales were direct transactions reported gross.
- North America gross profit increased 2.3%; International gross profit fell 15.0%. International gross billings were down 9.1%, reflecting weaker customer activity, lower spend per active customer, and currency effects. Foreign exchange reduced reported revenue by $7.0 million.
- Management attributed the narrower operating loss primarily to lower SG&A and restructuring costs. SG&A fell 11.8%, including a $25.2 million decrease in compensation-related costs associated with workforce reductions.
- Trailing-twelve-month active customers were 48.3 million, including approximately 0.9 million from LivingSocial. Gross billings per average active customer declined to $122.68 from $130.93; quarterly units fell to 45.7 million from 47.2 million.
- Operating cash outflow reflected a $138.2 million reduction in accrued merchant and supplier payables, attributed largely to seasonal post-holiday supplier payments and lower Goods activity. Cash used in financing included $27.2 million of treasury-stock purchases.
Outlook, risks, contingencies, and unusual items
- Management expected operating expenses to continue declining through 2017 and restructuring actions to be substantially complete by September 2017. It expected to continue substantial marketing investment; marketing as a percentage of gross billings was expected to increase year over year in both segments.
- An April 2017 workforce reduction involving approximately 300 employees is expected to result in about $2.0 million of restructuring charges in Q2. Q1 restructuring charges were $2.7 million versus $11.5 million a year earlier.
- Q1 discontinued operations recorded $0.5 million net income, including disposition results. The exits included a $2.9 million pretax loss on Latin American disposals and a $1.8 million pretax gain on the Israel sale. Groupon recorded a $5.4 million liability for certain Latin American indemnifications; reasonably possible obligations under those indemnifications were estimated at $23.0 million.
- Groupon faces IBM patent litigation, including IBM claims seeking unspecified damages and injunctive relief; the company also asserts a patent claim against IBM. Management said reasonably possible legal losses beyond amounts accrued were not expected to have a material adverse effect, but litigation remains uncertain.
- Tax audits are ongoing. The company said changes of up to $35.3 million in unrecognized tax benefits could occur within 12 months. Its Q1 tax expense was $4.6 million despite a pretax continuing-operations loss of $16.3 million, reflecting valuation allowances and taxes in profitable jurisdictions.
- Key risks include competition, customer and merchant retention, marketing effectiveness, international and foreign-exchange exposure (including Brexit), cybersecurity, litigation and regulation, restructuring execution, and the ability to maintain favorable merchant payment terms. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower revenue and customer spend are offset by sustainable gross-profit improvement, particularly in North America, and whether International gross-profit declines persist.
- Whether cash burn improves after seasonal supplier payments; monitor accrued merchant and supplier payables, cash balance, and compliance with the facility’s liquidity covenants.
- Progress and costs of restructuring, the April workforce reduction, and the expected expense savings and marketing investment.
- Potential outcomes and financial exposure from IBM litigation, Latin American indemnifications, and tax audits.
- Effects of the country disposals, foreign-exchange movements, and the evolving mix of direct versus third-party Goods transactions on reported revenue and margins.