Groupon, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Comparisons are with the three months ended March 31, 2013 unless otherwise noted. Groupon operates online marketplaces connecting consumers with merchants and reports North America, EMEA, and Rest of World segments. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $757.6 million | $601.4 million | +26.0% |
| Gross billings | $1,817.2 million | $1,407.8 million | +29.1% |
| Gross profit / gross margin | $385.7 million / 50.9% | $379.0 million / 63.0% | Profit +$6.7 million; margin down |
| Operating income (loss) | $(20.0) million | $21.2 million | Declined $41.1 million |
| Net income (loss) | $(35.4) million | $(3.2) million | Loss widened |
| Net loss attributable to Groupon, Inc. | $(37.8) million | $(4.0) million | Loss widened |
| Adjusted EBITDA (non-GAAP) | $40.3 million | $71.9 million | Down 43.9% |
| Operating cash flow | $(20.7) million | $8.8 million | Declined $29.5 million |
| Free cash flow (non-GAAP) | $(37.1) million | $(5.7) million | More negative |
Gross billings and revenue growth were driven substantially by Goods and the Ticket Monster acquisition. Direct revenue, where Groupon acts as merchant of record and reports sales gross, rose to $331.2 million from $162.3 million; third-party revenue, reported net of merchants’ shares, fell to $421.0 million from $437.2 million. The direct-revenue mix contributed to the lower consolidated gross margin. Direct-revenue gross margin was 6.5%, versus 6.1%; third-party gross profit as a percentage of third-party revenue was 86.3%, versus 84.0%.
Marketing expense increased to $78.9 million from $49.6 million, while selling, general and administrative expense rose to $325.0 million from $308.2 million. Income tax expense was $14.6 million despite a $20.8 million pretax loss; the reported effective tax rate was negative 70.1%, reflecting, among other things, losses in jurisdictions where tax benefits were not recognized.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $1,038.8 million at March 31, 2014, down $201.6 million from year-end 2013. Cash held in foreign jurisdictions was approximately $329.5 million.
- Current assets were $1,428.4 million and current liabilities $1,297.6 million, leaving working capital of approximately $130.8 million. Accrued merchant and supplier payables were $816.3 million.
- The filing reports no significant long-term borrowings; long-term capital lease obligations were $7.5 million. Groupon stated that available cash and expected operating cash flow should meet working capital and capital expenditure needs for at least 12 months.
- Operating cash use reflected a net decrease in working capital and other assets and liabilities, including lower merchant and supplier payables. Investing cash use was $138.6 million, including $117.7 million net cash paid for acquisitions. Financing cash use was $41.5 million, including $29.8 million for treasury stock purchases.
Material changes and business developments
- On January 2, Groupon acquired Ticket Monster, a South Korean e-commerce company, for approximately $263.0 million in cash and stock. It contributed $29.2 million of revenue and $13.6 million of net loss in the quarter. Management attributed $296.5 million of gross billings to the acquisition.
- On January 13, Groupon acquired Ideeli, a U.S. fashion flash-sale business, for approximately $42.7 million, primarily in cash. It contributed $15.9 million of revenue and $2.5 million of net loss.
- Class A shares issued for Ticket Monster consideration totaled 13.8 million. Groupon also repurchased 3.1 million shares for $29.5 million; $224.0 million remained under the $300 million authorization through August 2015.
- Segment revenue was $431.1 million in North America, $230.9 million in EMEA, and $95.7 million in Rest of World. Segment operating income, excluding stock-based compensation and acquisition-related expense, was $11.4 million, $18.9 million, and a loss of $24.7 million, respectively. North America and EMEA segment operating income declined substantially year over year.
- Active customers over the trailing twelve months increased to 51.8 million from 41.7 million, primarily reflecting the acquisitions. Gross billings per average active customer declined to $131.91 from $138.32. Quarterly units increased to 83.6 million from 45.2 million, also primarily due to the acquisitions.
Outlook, management commentary and risks
- The filing provides no formal revenue, earnings or other numerical full-year guidance. Management expected operating cash flow to be positive in annual periods for the foreseeable future, while cautioning that quarterly cash flow is affected by seasonality and Goods-related working capital.
- Management planned continued investment in acquisitions, technology, business-process automation, sales and marketing. It also expected to continue developing merchant products and expanding direct Goods sales, including in EMEA and Rest of World.
- Management said direct Goods sales carry lower margins and can increase fulfillment and inventory risks. A fulfillment center opened in late 2013; the company expected transition efforts could raise costs in the near term, with potential cost benefits later.
- Groupon attributed lower third-party take rates in several categories and markets to merchant terms, competition, and Ticket Monster’s lower deal margins. It warned that pressure to accept lower margins could continue.
- Significant risks include customer and merchant retention, competition, the profitability of the local-commerce marketplace strategy, international execution and foreign exchange, seasonality and working-capital volatility, inventory and fulfillment, cybersecurity, refunds, taxes and regulation.
- Pending matters include securities and stockholder derivative litigation related to the company’s 2011 financial reporting and controls, consumer and gift-card/coupon claims, and intellectual-property disputes. A previously agreed $8.5 million consumer class-action settlement remained subject to appeal. Management said reasonably possible losses beyond accruals were not expected to have a material adverse effect based on information then available, while noting litigation uncertainty and potential costs.
- Management assessed disclosure controls as effective at March 31, 2014 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported growth reflects acquisition contributions and gross presentation of direct sales, rather than improved underlying economics?
- Whether Goods growth, merchant take rates, inventory exposure and fulfillment costs can support durable gross profit and operating profitability.
- Whether customer spending per active customer, merchant retention and segment operating performance improve after the acquisition-driven rise in customers and units.
- Whether operating cash flow recovers as seasonal working-capital movements and merchant-payable balances normalize, and how cash is allocated among acquisitions, investment and repurchases.
- Developments in litigation, gift-card and unclaimed-property regulation, tax exposures, and the integration and performance of Ticket Monster and Ideeli.