- Groupon recorded a good quarter, beating revenue and non-GAAP EPS estimates.
- Future guidance was disappointing amidst rather unusual management commentary.
- Groupon remains a risky bet given unproven low margin goods business.
Groupon (NASDAQ:GRPN) announced Q1 2014 results on 6 May. The company’s revenue growth met their own guidance and surpassed analyst estimates. GRPN’s non-GAAP EPS beat both, the company’s guidance as well as estimates from analysts. However, the company’s stock was down about 10% in pre-market hours, as the company’s revenue guidance indicated a return to its rather flat growth trajectory, worsened by uncertainties in its transitioning business.
Groupon Q1 2014: Estimates vs Actuals
Revenue: $758 million vs guidance of $710-760 million and analyst estimates of $738 million.
Non GAAP EPS: $ -0.01 vs guidance of $ -0.04 to S -0.02 a share and estimates of $ -0.03 a share.
Groupon delivered a decent quarter in terms of revenue growth and EPS. However, in the absence of a break-up of revenue contributions from its acquisitions, it’s unclear how much of the growth is the company’s organic growth.
Going by the company’s expectation of revenue ($50 million) from these acquisitions, the company’s organic revenue would be about $707 million, representing a growth of about -7.9% sequentially and 17.7% Y/Y, both of which are not very flattering.
Groupon Q1 2014: Key Financials & Metrics
Groupon’s revenue grew by 26% Y/Y in Q1 to reach $758 million, near the top end of their guidance. The company recorded operating and net losses of $20 million and $37.8 million respectively, translating to margins of -2.6% and -5%. GRPN delivered a non-GAAP EPS of $ -0.01.
Groupon generated an operating cash flow of $ -20 million to end Q1 with cash and cash equivalents of a little over $1 billion.
Driven by the acquisition of Korean deals, e-commerce and travel business Ticket Monster, revenue from Rest Of the World (ROW) grew faster than Europe Middle East and Africa (EMEA) and North America (NA) regions to account for a larger share of the revenue than it did in Q4 2013.
Operating margins in this region were at about -25% vs 8.2% and 2.6% in the other 2 regions respectively. About 60% of the operating losses were attributable to marketing spends to aid Ticket Monster and the company’s winding up of Groupon Korea.
GRPN’s goods segment grew by about 68% while the ‘local’ and ‘travel’ segments remained flat to marginally negative Y/Y respectively.
Overall, Groupon’s improvement in gross margins was more than offset by an increased marketing spends and selling, general and administrative (SG&A) costs driven by acquisition related costs.
Groupon’s share buyback program mopped up over 3 million shares at an average price of $9.58 a share aggregating to $29.5 million in Q1. The company has an authorization to spend up to $224 million for this cause after having used up $76 million so far.
Groupon Q2 2014 Guidance:
Groupon’s guidance pegs Q2 revenue at $725 - $775, growing at 19-30% Y/Y and -4.3% to 2.3% sequentially which indicates a return to its somewhat flat trajectory, even after the acquisitions.
Non GAAP EPS guidance ranges from $0 to $0.02.
Groupon: Future Outlook & Valuation
Groupon aims to take ‘local’ (deals) growth into double digits by the end of 2014 in North America and EMEA regions. If this pans out, it will help Groupon’s profit margins since this segment typically has high gross margins.
Following the current market flavor, Groupon showed resolve to improve profitability in its earnings con-call, as they identified operating profits in the ROW region as one of their goals for FY 2014.
Further, GRPN also intends to bring down costs in its e-commerce (goods) business so as to double its gross margins by the end of FY 2014.
However, by its own admission, the measures that the company is taking will boost margins at the cost of revenue in the goods segment. The company expects growth in gross billings in the goods segment to normalize to about 25% Y/Y from its current 80%.
The projected increase in profitability in the goods segment is not a result of scale, but a cut back in customer conveniences such as an increase in units per order and the free shipping threshold.
What’s more worrying is that the tone seems to have changed from a firmly growth oriented business, to one that recognizes the word ‘profits’, and is willing to side-line growth. One might wonder if this has to do with the recent bashing that momentum stocks like Twitter, LinkedIn and Amazon have received.
At a price of $6.72 a share, Groupon trades at a Price/Sales ratio of about 1.64 which is not really expensive. Further, that P/S multiple looks likely to go down further, going by the wrath of the markets in pre-market hour. However, Groupon remains a risky bet.
Broadly, by the end of the year, if CEO Mr. Lefkofsky’s plans remain on track, one might find a much healthier, more sustainable business in GRPN. But at this point in time, it’s hard to predict the shape and size of this business a year from now.
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