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Groupon (GRPN) Q4 Earnings and Revenues Beat Estimates

Zacks

Shares of Groupon Inc. GRPN were up 22.75% on Feb 15 following impressive fourth-quarter 2016 results. The company reported earnings of 3 cents per share as against the Zacks Consensus Estimate of a loss of 2 cents.

However, we note that, shares of Groupon have underperformed the broader Zacks Internet Commerce industry over the last one year. While the industry registered growth of 46.3%, the stock gained only 21.9%.

The underperformance of the stock could be primarily due to an intensifying competitive landscape that has increased pricing pressure for the company.


Revenues

Revenues of $935 million beat the Zacks Consensus Estimate of $911 million and also inched up 1.9% on a year-over-year basis. Direct revenues (63.5% of total revenue) increased 3.8% while Third Party & other (36.5% of total revenue) declined 1.2% from the year-ago quarter.

Region-wise, revenues from North America increased 4.5% from the year-ago quarter while that from EMEA and the Rest of World (Asia-Pacific and Latin America) declined 2% and 11.7% year over year, respectively.

On a constant currency basis, Rest of World (Asia-Pacific and Latin America) revenues declined 8% on a year-over-year basis, while EMEA increased 1%.

Gross billings dipped 0.4% year over year to $1.67 billion in the quarter. Region-wise, billings from North America jumped 5.9% year over year. However, billings from EMEA and the Rest of World declined 8.9% and 15.4% year over year, respectively.

On a same-country basis, gross billings grew 2% year over year excluding the unfavorable impact of foreign exchange rates.

North America local gross billings of $1.1 billion grew 5.9% and North America local revenues of $650.8 million grew 4.5% in the reported quarter primarily attributable to new customer additions as well as the acquisition of LivingSocial.

During the quarter, Groupon reduced its country presence to 24 from 47. The company plans to finally operate in 15 countries in Europe and North America.

As of Dec 31, 2016, Groupon had approximately 31.1 million active customers in North America. The company added nearly 5.2 million new customers in the quarter. Active customers were 52.7 million.

Operating Details

Gross margin contracted 100 basis points (bps) on a year-over-year basis to 39.6% in the quarter. The year-over-year decline was primarily attributed to lower Third Party & other gross margin, which fell 120 bps, partially offset by 380 bps increase in Direct gross margin.

North America gross profit increased 14%, EMEA declined 25% and Rest of World slumped 10%. Local gross margins stood at 31.4% as compared to 30.1% in the year ago quarter. On the other hand, Goods margins expanded by 140 bps to 11.7% on the back of improved pricing algorithms.

Adjusted EBITDA margin expanded 130 bps to 8.6% reflecting successful implementations of the company’s streamlining initiatives.

Groupon’s operating expenses dropped 6.3% year over year to $347.8 million due to lower selling, general & administrative expense (SG&A), which was down 11.6%, reflecting the benefits of streamlined operations and lower headcount.

Marketing expenses increased 12.2% from the year-ago quarter due to investments on customer acquisition both online and off-line.

Nevertheless, Groupon reported operating loss of $362.4 million as compared with a loss of $377.2 million reported in the year-ago quarter.

Balance Sheet and Cash Flow

As of Dec 31, 2016, Groupon had cash and cash equivalents worth $891.8 million as compared with $853.3 million as on Sep 30, 2016.

Free cash flow was $268.9 million up a 14.5% when compared to the year ago quarter.

During the fourth quarter, Groupon repurchased 12,397,795 shares of its common stock for an aggregate purchase price of $49.9 million.

Outlook

For first-quarter 2017, Groupon intends to bring its country count to 15 with respect to its strategy of streamlining its business.

Seasonally, the first quarter is the lightest. Groupon expects to report lowest billings and adjusted EBITDA. However, management expects adjusted EBITDA to be slightly better that the year-ago quarter.

For full-year 2017, Groupon projects gross profit to remain in a range of $1.30 billion to $1.35 billion (for the 15 countries), a jump of $40 million to $90 million from full year 2016 on an FX neutral basis.

Also, adjusted EBITDA is expected to remain in a range of $200 million to $240 million (for the 15 countries), a jump of $16 million to $56 million compared with full year 2016 on an FX neutral basis.

Our Take

Groupon’s new business strategy (with core focus on marketing, international and shopping) appears to be working. Its performance has started to improve since the past few quarters after CEO Rich Williams took the helm.

The company continues to see strength in its customer acquisition and shopping endeavors, aimed at developing its local core business. Notably, its North American business returned to growth during 2016 after hitting a patch of stagnation.

Further, the company has been taking a number of strategic initiatives to streamline its operations. Additionally, it has increased its marketing spend, which should boost its business to a great extent in the long run.

Although softness in the business was observed during the run up to the elections and a few weeks after it, the company is again back on a strong footing. This indicates growing demand for the company’s platforms, which augurs well in the long run.

However, Groupon is investing quite a bit in the transition, which is expected to affect its near-term financials. Competition from giants like eBay EBAY and Amazon.com AMZN and impending lawsuits are the other headwinds investors need to watch out for.

Groupon, Inc. Price, Consensus and EPS Surprise

Zacks Rank & Key Picks

At present, Groupon has a Zacks Rank #4 (Sell).

A better-ranked stock in the broader technology space is Alibaba Group Holding Limited BABA, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Notably, the consensus estimate for Alibaba’s current year has improved to $2.65 from $2.15 over the last 30 days.

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