- Groupon reported an earnings surprise of 3 cents per share and revenue beat of 2%, with EPS of 6 cents on revenue of $925 million.
- The company also reported solid growth in key operating metrics. However, the cash position at the end of the quarter was not very encouraging.
- The continued investment phase with a lack of earnings visibility makes Groupon stock a risky bet at its current valuations.
Groupon (NASDAQ:GRPN) earnings for Q4 2014 were reported after the bell yesterday (February 12). The company beat analyst estimates on both topline as well as bottomline. Analysts on a consensus basis anticipated the company to report earnings per share (EPS) of $.03, and revenue of $905 million. The company reported earnings of 6 cents, on revenue of $925 million. The earnings surprise was in-line with our expectations, as mentioned in our earlier post titled Groupon headed for a strong finish to 2014. However, the Groupon stock lost 2.3% in volatile after-hours trade, as the management’s Q1 2015 guidance fell short of expectations.
Groupon Earnings Summary For Q4 2014
Groupon reported a topline growth of 20% YoY accompanied by a 50% growth in Non-GAAP earnings per share (EPS). The GAAP earnings per share came in at 1 cent per share, 13 cents higher than the year ago quarter. Groupon Q4 2014 earnings and YoY growth is summarized in the table below.
|In millions of $, except EPS||Q4 2013||Q4 2014||YoY growth|
Source: Groupon earnings release
Groupon revenue growth was driven by a 44% YoY growth in direct revenue, which contributed 57% to Groupon revenue in Q4. The huge growth in direct revenue is a result of the management’s focus to transition from a flash deals major to an e-commerce firm selling goods and services. On the geographical front, Rest of world revenue was up 141% YoY, driven by Ticket Monster acquisition. Adjusting for the effects of the acquisition, the rest of world segment grew by 6% on a forex neutral basis.
Groupon Profitability Q4 2014
|Profit margins||Q4 2013||Q4 2014||YoY change|
|Gross profit margins||49.2%||42.5%||-6.7%|
|Operating profit margin||1.7%||2.0%||0.3%|
|Net Profit margin||-10.6%||0.9%||11.5%|
Groupon registered a 6.7 percentage point drop in gross margins, driven by the higher percentage of direct revenues (which have a higher COGS) and also lower margin revenues from Ticket Monster. In spite of contraction at the gross level, the cost controls at play saw operating profit expand by 30 basis points and Net profit margin increased by 11.5 percentage points, coming in at a positive 0.1%. Revenues outgrew operating expenses for the quarter, driving the operating profit margin expansion. The net profit margin expansion was also positively impacted by a tax benefit of $4 million. While the company delivered a good result on the financial parameters, we also take a look at the key operating metrics.
Groupon Operating Metrics Q4 2014
Groupon revenue growth and gross billings growth is a function of Active customers, Spend per Active customer as well as units sold. Groupon reported strong growth in each of these metrics as seen in the chart below.
Source: Groupon earnings presentation
The company also saw 10 million people download the Groupon App, taking the total app downloads to 110 million at the end of Q4 2014, up by 40 million from Q4 2013.
Groupon Cash Flow Analysis Q4 2014
Groupon reported free cash flow of $266 million, at a healthy free cash flow margin of 28%. This was Groupon’s strongest quarterly performance on the measure of free cash flow and was impacted hugely by the forces of seasonality. However on a TTM (trailing twelve month) basis, the free cash flow margin was significantly lower at 8%, which is a more representative measure of Groupon’s free cash flow ability. The company ended the quarter with $1.1 billion in cash and cash equivalents, $165 million lower than the year ago quarter. The cash and cash equivalents balance was only 77% of the trailing twelve month operating expenses, raising concerns on the ability of Groupon to finance its growing operations. The firm might need to raise debt in order to manage its current cash burn rate, which is a function of its growing operations and investments associated with the same.
Groupon Q1 2015 guidance
The management issued the following guidance for Q1 2015.
- Revenue range of $790-$840 million, implying growth of 4%-11% on a YoY basis.
- Adjusted EBITDA of $45-$65 million, implying a YoY growth of 12% to 61%.
- Non-GAAP EPS of $0.00-$0.02 per share.
The management guidance was lower than analyst estimates of 3 cents earnings on revenue of $856 million.
Groupon stock is currently trading at a price-to-sales multiple of 1.61, which isn’t expensive as compared to most of its internet peers. However, the lack of profitability, continued investment and slower topline growth with no earnings visibility makes it a highly risky investment at its current valuations.
To sum up, Groupon reported a fairly strong quarter on most financial parameters and key operating metrics. The one concern was its cash balance and the ability to finance its immediate growth without the use of debt. However, the stock continues to remain a risky investment and we wouldn't put our money into this one. Our Groupon stock analysis video outlines the risks associated with investing in Groupon stock, reflecting our negative outlook on the stock. What do you think of Groupon earnings for Q4? Do let us know in the comments section below.