Groupon (GRPN) Q2 Earnings Miss, Keeps View Despite IBM Woes
Groupon Inc. GRPN reported disappointing second-quarter 2018 results. The company reported non-GAAP earnings of 2 cents per share, which missed the Zacks Consensus Estimate by a penny. Further, the figure remained flat on a year-over-year basis.
Revenues of $617.4 million declined 6.8% on a year-over-year basis (9% at FX neutral), lagging the Zacks Consensus Estimate of $631 million.
The company has been trying to reduce dependence on goods deals and is shifting focus toward local services market. This is because local services market is a high margin business while goods deals bring in high revenues but smaller margins. The transition continues to hurt the company’s revenues as reflected in second-quarter results.
During the quarter under review, International Business Machines IBM demanded $167 million from Groupon for the unauthorized use of its patented technology. Per IBM, tech giants Amazon, Facebook and Alphabet’s Google pay a price of $20-$50 million for using the e-commerce technology in question.
Recently, IBM was awarded $83 million by a US jury verdict stating Groupon “willfully” infringed on its four e-commerce patents. Consequently, Groupon incurred $75 million litigation charge. This expense has impacted the second quarter’s EBITDA margin growth.
Groupon plans to aggressively pursue its point via appeal and post-trial motions. Meanwhile, the company’s lawyer had earlier retaliated by saying, “A key question for you in this case is whether these patents cover the World Wide Web. They do not and that is because IBM did not invent the World Wide Web.”
Let’s now check out the numbers in detail.
Service revenues (47.9% of total revenues) declined 6.4% year over year to $295.7 million. Product (52.1%) revenues slumped 7.2% to $32.7 million in the same period.
Region-wise, North America revenues (61.6% of total revenues) decreased 15.9% from the year-ago quarter to $380.3 million. Meanwhile International revenues (38.4%) increased 12.5% year over year or 4.5% excluding foreign exchange effect, to $237.1 million.
In the second quarter, billings from North America were $838.4 million, down by 14% year over year. However, international billings increased 9.3% to $425.9 million.
North America local gross billings came in at $548.1 million, slipping by11%. Local revenues of $548.1 million declined 11% from the year-ago quarter. Further, goods billings and revenues fell 20.1% and 21.4% to $196.5 million and $174.5 million, respectively.
International local gross billings were $203.3 million, growing by 7.3% (1.1% excluding foreign exchange effect). Local revenues of $71.4 million grew 8% from the year-ago quarter (1.5% excluding foreign exchange effect). Moreover, goods billings and revenues increased 12.6% and 16.6%to $173.9 million and $156 million, respectively.
Groupon’s online marketplaces have been categorized under three heads, namely Local, Goods and Travel. Consolidated revenues from Local (41.6% of total revenues), Travel (4.8%) and Goods (53.5%) declined 6%, 10.6% and 7.1%, respectively from the year-ago quarter.
Gross profit from Local and Travel marketplaces declined 3.8% and 9.1% to $232.7 and $25.2 million, respectively.
However, gross profit in the Goods market grew 12.6% to $65.8 million. Groupon expects Goods to be a key customer engagement tool going ahead, enabling the company to introduce new goods buyers to local marketplace.
As of Jun 30, 2018, Groupon had approximately 17.1 million active customers internationally compared with 17 million at the end of the previous quarter.
As of Jun 30, 2018, the company had approximately 32.2 million active customers based in North America compared with 32.6 million at the end of the previous quarter.
The company continues to take initiatives to boost card linked offers platform and enhance customer experiences.
Management noted that its new offering Groupon+ is being well received as the company is enhancing customer experience by investing in voucherless initiatives. This is expected to be a catalyst going ahead.
The company’s partnership with Grubhub GRUB continues to enable customers to order food delivery from more than 80,000 restaurant partners of Grubhub via Groupon platform.
Further, partnerships with CoreSource, American Express AXP, Major League Baseball, among others are aiding Groupon to cater to just about any local need, consequently aiding it to rapidly penetrate the market.
With a proper mix of products along with accelerating consumer activities, management anticipates growth going forward.
Gross profit was during the quarter came in at $323.7 million, down1% (3% at FX neutral). Internationally, gross profit surged 11% (4% on an FX-neutral basis) to $104.3 million. However, North America gross profit dipped 6% to $219.4 million.
Management noted that the second quarter marks the fourth consecutive quarter of growth in gross profit.
Continued focus on execution of its product, supply, and marketing initiatives were positives in the quarter under review. However, litigation expense worth $75.0 million on IBM lawsuit disturbed the balance.
Successful implementation of the company’s streamlining activities was evident from the 5.5% year-over-year increase in adjusted EBITDA, totaling $56.2 million.
Global units sold during the quarter declined 10% year over year to 40 million. North America units were down 14% year over year, primarily due to the divestiture of certain OrderUp assets and continued investments in scaling Groupon+.
SG&A expenses surged 27.8% year over year to $294.1 million in the reported quarter. Management noted that excluding the $75.0 million litigation expense on IBM lawsuit, the metric declined 5% highlighting company’s efforts on improving operational efficiency.
Marketing expenses declined 6.4% to $94.2 million primarily due to optimizing spend in regard to high value customers. However, as a percentage of revenues, the marketing expenses expanded 6 basis points (bps).
Net loss from continuing operations was reported at $92.3 million compared with the year-ago figure of $5.4 million, owing to the $75.0 million IBM litigation expense.
Non-GAAP net income was reported at $10.7 million, down 10.4% from the year-ago quarter.
Balance Sheet & Cash Flow
Groupon exited the quarter ending Jun 30, 2018, with cash and cash equivalents of $662.9 million down from $725.9 million, reported at the end of the previous quarter. The company incurred $58 million in buying Vouchercloud during the second quarter.
Net cash generated from operations during the quarter came in at $44.2 million, compared with $119.7 million utilized in the previous quarter.
Free cash flow came in at $26.8 million in the second quarter compared with ($139.9) million in the previous quarter.
For the third quarter, the company envisions revenues to be around $600 million, lower than the Zacks Consensus Estimate pegged at $603.1 million. Gross Profit is expected in the range of $315-$320 million.
North America segment is anticipated to be flat on a year-over-year basis, while International segment is projected to report growth in gross profit dollar terms.
Marketing spend backed by ongoing investments directed towards new international customer acquisition is expected to increase sequentially. Meanwhile, SG&A expenses are anticipated to decline sequentially. Consequently, Groupon envisions adjusted EBITDA near “the high $40 million range”.
For full year 2018, Groupon reiterated its adjusted EBITDA guidance. The company maintains adjusted EBITDA outlook in the range of $280-$290 million. Free cash flow (excluding potential payments pertaining to IBM litigation) is anticipated to come in at approximately $200 million.
As evident from the results, the transition to high margined local services market is hurting revenues. Additionally, the recent lawsuit from IBM is likely to hurt margins in the near term.
However, growth in international goods billings is a positive. Moreover focus on EBITDA and gross profit growth bode well. The fact that the financial outlook remains unchanged despite IBM litigation woes reinforces promise.
Furthermore, stringent cost initiatives, improving operational efficiency trends augur well going ahead.
Groupon carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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