Groupon Inc. (GRPN) reported second-quarter loss of 2 cents per share (including stock-based compensation, acquisition-related expenses and tax impact), which compared unfavorably with earnings of 2 cents reported in the year-ago quarter. However, loss per share was narrower than the Zacks Consensus Estimate of 4 cents per share.
Revenues jumped 23.5% year over year to $751.6 million, which missed the Zacks Consensus Estimate. The year-over-year growth was primarily driven by 82% surge in direct revenues, which offset 3.1% decline in third party and other revenues in the reported quarter.
Region-wise, revenues from North America, EMEA and Rest of the world (Asia-Pacific and Latin America) increased 12.4%, 42.3% and 39.6% year over year, respectively. EMEA revenue growth was driven by higher mix of direct revenues.
Gross billings increased 29% year over year to $1.82 billion, driven by 26% year-over-year growth in goods business and 44% growth in travel. Region-wise, billings from North America increased 12.2% year over year, while it soared 144.8% in Rest of the world.
North American local billings increased 1.8% year over year due to lower redemptions. Per management, the average number of unused Groupons per customer (a good indicator of people’s willingness to buy more) has stabilized more this year. Last year, it declined more than 25%.
Rest of the world billings growth was primarily driven by robust performance by Ticket Monster (:TMON), which Groupon acquired early this year. Excluding the TMON business, revenues increased 40% from the year-ago quarter.
Despite 14% year-over-year growth in goods business, EMEA billings remained flat on a year-over-year basis in the quarter.
As of Jun 30, 2014, active customers increased 25% year over year to 53.2 million, comprising 22.6 million in North America, 14.5 million in EMEA and 16.1 million in Rest of the world.
At the end of the quarter, on an average, active deals were over 240K globally, compared with more than 200K at the end of first-quarter 2014. North American active deals increased to over 105K.
Groupon reported that approximately 50% of the worldwide transactions were through mobile devices. More than 92.0 million people downloaded Groupon’s mobile app to-date.
Groupon is set to launch two new products namely Pages and Genome, which together will allow it to enhance its local offerings. Through Pages Groupon users will be able to find every local merchant and their contact information, locations, time of service, recommendations, tips, and most importantly, the variety of discounts the merchants offer.
Genome is a service for merchants that helps them to identify customers with Groupon coupons and enable them to pay for purchases using Apple (AAPL)’s iPad mini. The service will help local businesses process coupons without a printed or digital voucher, accept credit-card payments and customize marketing campaigns for vendors to target specific customers.
Gross margin decreased from 63.2% to 51.9% in the quarter due to unfavorable business mix. Adjusted earnings before interest, tax, depreciation and amortization (:EBITDA) were $50.1 million compared with $80.5 million in the year-ago quarter.
Operating expenses increased 10.9% year over year to $397.1 million due to higher selling, general & administrative expenses (up 15.8%) as well as marketing expenses (up 10%). As a result, operating loss was $18.2 million compared with operating profit of $21.2 million in the year-ago quarter.
Segment-wise, North America operating income was $14.5 million significantly down from $48.5 million in the year-ago quarter. EMEA increased slightly to $27.8 million from $24.7 million in the year-ago quarter, primarily due to lower marketing costs.
Rest of the world reported loss of $17.9 million compared with $85.8 million in the year-ago quarter, reflecting continuing investments in TMON.
Groupon’s net loss (including stock-based compensation but excluding acquisition-related expenses and tax impact) was $15.0 million or 2 cents per share as compared with profit of $11.3 million or 2 cents reported in the year-ago quarter.
Groupon exited the second quarter with cash and cash equivalents worth $868.1 million compared with $1.04 billion reported in the previous quarter. Cash outflow from operating activities was $22.7 million compared with cash outflow of $20.7 million in the previous quarter.
Free cash outflow in the reported quarter was $53.8 million compared with $37.1 million in the previous quarter. The company spent $106.0 million on share buyback during the quarter. Approximately $118 million remains available under the company’s existing repurchase authorization, which will expire in Aug 2015.
During the quarter, Groupon entered into a three-year, $250 million revolving credit facility.
For the third quarter of 2014, Groupon forecasts revenues in the range of $720 to $770 million. The mid-point of the guidance range is slightly lower than the Zacks Consensus Estimate of $758 million.
Groupon expects EBITDA in the range of $50.0 to $70.0 million for the quarter. Management expects to report earnings per share between breakeven and 2 cents for the third quarter of 2014. The Zacks Consensus Estimate is currently pegged at a loss of 2 cents.
North America local billings are expected to accelerate in the second half, which will help the company post double-digit growth by year-end. Groupon also believes that it is on track to achieve double-digit gross margin in North America by the end of this year.
Excluding TMON, Groupon expects to generate positive segment operating income in Rest of the world by the fourth quarter of this fiscal year.
For fiscal 2014, adjusted EBITDA is expected to be $270.0 million (down from $300.0 million).
We believe that Groupon is well positioned to gain from the rising e-Commerce spending on mobile devices, a profitable domestic market and an under-penetrated international market. We expect these opportunities to continue to drive top-line growth. Moreover, increased traction in the mobile business is another positive for the company.
However, Groupon’s lowered EBITDA guidance reflects ongoing investments that will continue to hurt profitability. We note that in North America, the company continues to face significant competition, which is a major headwind in the near term.
Moreover, the Genome offering will bring Groupon into direct competition with in-store payment providers (both hardware and software) like VeriFone (PAY), Micros Systems (MCRS) and Salesforce.com, which will be a headwind in the long run.
Currently, Groupon carries a Zacks Rank #3 (Hold).
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