Groupon, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Groupon operates online local-commerce marketplaces in North America and International, across Local, Goods and Travel. Financial statement amounts below are unaudited and in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $617.4 million | $662.6 million | $1,243.9 million | $1,336.2 million |
| Gross profit | $323.7 million | $328.1 million | $648.5 million | $637.5 million |
| Gross margin | 52.4% | 49.5% | 52.1% | 47.7% |
| Operating income (loss) | $(64.2) million | $(7.4) million | $(60.9) million | $(19.1) million |
| Net loss attributable to Groupon | $(95.0) million | $(9.3) million | $(101.9) million | $(33.7) million |
| Adjusted EBITDA | $56.2 million | $53.3 million | $108.8 million | $98.1 million |
| Operating cash flow | $44.2 million | $(19.4) million | $(75.6) million | $(157.5) million |
| Free cash flow | $26.8 million | $(34.8) million | $(113.1) million | $(186.9) million |
- Q2 revenue fell 6.8% year over year; six-month revenue fell 6.9%. Gross profit declined 1.3% in Q2 but rose 1.7% for the half year. Reported gross margins improved, alongside a shift in revenue mix and lower-margin Goods rationalization.
- Q2 operating results included a $75.0 million IBM patent-litigation charge in selling, general and administrative expense. Adjusted EBITDA excludes this item and other specified items; it is a non-GAAP measure.
- Q2 other expense was $26.5 million, primarily reflecting $12.5 million of foreign-exchange losses, $9.2 million of investment impairments, $5.2 million of interest expense and $3.0 million of fair-value investment losses.
- At June 30, cash and cash equivalents were $662.9 million, down from $880.1 million at December 31, 2017. Current assets were $843.7 million and current liabilities $918.8 million. The company had $195.6 million of convertible notes, net carrying value, against $250.0 million principal; no revolver borrowings and $18.6 million of letters of credit.
- Six-month cash use included $96.1 million in investing activities, including $57.8 million net cash paid for Cloud Savings, and $39.6 million in financing activities. Operating cash use was attributed principally to working-capital movements, including seasonal supplier payments.
Material changes versus prior periods
- North America revenue fell 15.9% in Q2 and 16.4% for the half year; International revenue rose 12.5% and 14.5%, respectively. International growth benefited from favorable currency movements; North America declines reflected weaker Local and Goods activity.
- Gross billings fell 7.3% in Q2 and 6.0% year to date. North America gross billings fell 14.0% in Q2, while International gross billings rose 9.3%. Units sold fell to 40.0 million in Q2 from 44.5 million and to 82.4 million for the half year from 90.2 million.
- Active customers reached 49.3 million for the trailing twelve months, up from 48.3 million a year earlier, but down from 49.7 million at March 31, 2018. Management attributed the sequential decline partly to concentrating marketing on customers with higher expected lifetime value and expected that trend to continue through the rest of 2018.
- Groupon adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method. Adoption reduced opening accumulated deficit by $88.9 million and changed timing and classification for items including unredeemed vouchers, customer credits, hotel bookings, refunds and merchant-acquisition costs. Prior-year figures were not restated, so reported comparisons are not fully like-for-like.
- On April 30, Groupon acquired 80% of UK-based Cloud Savings for $74.3 million in aggregate consideration, including $64.1 million cash. The business contributed $3.0 million revenue and $0.1 million net loss from acquisition through June 30. Groupon has an arrangement to acquire, or be required to purchase, the remaining shares for $8.9 million in December 2018.
Outlook, risks and unusual items
- No quantified company-wide revenue or earnings guidance is provided in the supplied filing text. Management said it believes cash, operating cash generation and available borrowing capacity should meet working-capital and capital-expenditure needs for at least the next twelve months.
- Management is shifting North America toward Local offerings and developing Groupon+ voucherless, card-linked deals and appointment booking. It believes these could support long-term gross-profit growth, but warned that early-stage investment may weigh on near-term gross profit and operating income; scaling Groupon+ may also initially pressure cash flow because cash back is paid before merchant reimbursement is collected.
- On July 27, 2018, after quarter-end, a jury found willful infringement of IBM patents and awarded IBM $82.5 million. Groupon had recorded a $75.0 million Q2 charge and accrued $82.5 million at June 30. The court could enhance or reduce/vacate damages, impose interest or continuing royalties, or grant injunctive relief. Groupon said it would seek post-trial relief and appeal.
- Groupon disclosed foreign tax assessments and a proposed assessment totaling $134.5 million, principally concerning transfer pricing in 2011–2014. It considers them without merit and intends to contest them. Separately, it said up to $40.6 million of unrecognized tax benefits could be reduced within the following 12 months.
- The $250 million revolving facility matures in 2019 and requires at least $400 million of unrestricted cash, including $200 million held with lenders or affiliates, along with financial covenants. The company reported compliance at June 30. International subsidiaries held $259.5 million of cash; management generally intends to reinvest non-U.S. earnings abroad.
- A new authorization permits up to $300 million in share repurchases; none were made under the program during the quarter. Other disclosed risks include foreign-exchange exposure, investment valuation and impairment, merchant retention, customer acquisition, refunds, cybersecurity, regulation and litigation.
Key facts for investors to verify
- Subsequent IBM case developments, final judgment, potential enhancements or continuing royalties, and the adequacy of the litigation accrual.
- Underlying operating trends excluding currency effects and ASC 606 timing/classification changes, especially North America Local and Goods, gross billings, units and active customers.
- Cash conversion and working-capital seasonality, including supplier payment timing and the cash-flow effects if Groupon+ grows.
- Liquidity headroom under the credit facility’s cash and financial covenants, as well as the facility’s maturity and any refinancing plan.
- Resolution and potential financial impact of the $134.5 million tax assessments, other uncertain tax positions, and Cloud Savings purchase obligations and integration.