Groupon Swings to Earnings in Q3, Outlook Soft, Falls 25%

Groupon Inc. GRPN reported third-quarter 2015 adjusted earnings of 2 cents per share, which compared favorably with the Zacks Consensus Estimate of a loss of 4 cents per share. On a year-over-year basis, Groupon’s earnings fared better than the prior-year quarter’s loss of 1 cent.

 

Groupon Inc. (GRPN) - Earnings Surprise | FindTheCompany

 

The company reported non-GAAP earnings of 5 cents a share, ahead of the guided range of breakeven to 2 cents per share.

However, despite the improved bottom line performance, the company shares tanked over 25% in after-hours trading yesterday.

Quarterly Details

Revenues decreased 5.7% year over year to $713.6 million and also lagged the Zacks Consensus Estimate of $730 million. However, sales were within the company’s projected range of $700 million and $750 million.

Region-wise, revenues from North America and EMEA increased 10.9% and 2.2% respectively while that from the Rest of World (Asia-Pacific and Latin America) declined 5.1%, from the prior-year quarter.

Gross billings increased 1.5% year over year to $1.5 billion in the quarter. Region-wise, billings from North America increased 12.3% year over year. However, billings from the EMEA region and Rest of World declined 15.3% and 18.9% year over year, respectively.

As of Sep 30, 2015, its active customers increased 4.3% year over year to 48.6 million, with 25.2 million customers in North America, 15.4 million in EMEA, and 8 million in Rest of World.

At the end of the quarter, on an average, active deals were about 570K globally while those in North America rose to 290K.

Operating expenses increased 12.7% year over year to $399.9 million.

The company’s non-GAAP EBITDA was $56.3 million in the quarter compared with $63.9 million in the prior-year quarter.

Loss from continuing operations was $24.6 million compared with a loss of $12.6 million in the year-ago quarter.

The company repurchased 44.1 million shares in the quarter for $192.9 million.

Balance Sheet and Cash Flow

Groupon exited the quarter with cash and cash equivalents worth $963.6 million compared with $1 billion as on Dec 31, 2014. Cash used in operating activities was $26.8 million in the quarter compared with cash flow of $45.5 million reported in the prior-year quarter.

Free cash outflow was $35.4 million in the quarter.

Outlook

The company provided its guidance for fourth-quarter 2015 and fiscal 2016. The outlook is based on the three focus areas detailed by the new CEO Rich Williams namely marketing, international and shopping.

For the fourth quarter of 2015, Groupon forecasts revenues in the range of $815 million and $865 million. Groupon expects adjusted EBITDA in the range of $40 million and $60 million for the quarter. Management expects the bottom line (on a non-GAAP basis) to be in the range of a loss of 1 cent to earnings of 1 cent per share. The company expects results in the quarter to be impacted by the ongoing restructuring activities, owing to the company’s shift in focus from the lower margin shopping businesses, and sluggish growth on the international front.

For 2016, the company expects revenues between $2.75 billion and $3.05 billion. Adjusted EBITDA for 2016 is projected to be between $75 million to $125 million, including marketing investments of $150 million to $200 million in the year.

Our Take

Groupon has been struggling for the past few quarters. In September, the company declared its decision to restructure its international business by exiting as many as seven countries. This resulted in the elimination of nearly 10% of its workforce.

The new restructuring plan directly contradicts the company’s earlier business model per which Groupon undertook rapid international expansion and that too at the cost of profits.

The increased uncertainties cast a shadow on the growth prospects from the increase in e-commerce spending on mobile devices.

In addition, the company continues to face significant competition not only from giants like eBay and Amazon.com AMZN but also from small companies like LiveDeal, which is a major near-term headwind. Growing competition is expected to keep Groupon’s pricing under tremendous pressure in the near term. Furthermore, it reduces the company’s bargaining power with the merchants as they can move to other deal providers.

Moreover, the soft outlook provided by the company failed to impress investors.

Groupon, at present, has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the same space include Expedia Inc. EXPE and PetMed Express, Inc. PETS, both having  a Zacks Rank #2 (Buy).

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