Groupon Earnings Preview: While Top-Line Could Under-Perform, We Expect Profitability To Improve

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Groupon (NASDAQ:GRPN) is scheduled to report its earnings for the first quarter of 2015 on Tuesday, May 5th. The company recently divested a controlling stake in its South Korean business, which will be treated as a discontinued operation in the current financial results. Though this divestiture, together with currency headwinds, will impact its top-line growth rate, we expect strong demand across product categories and North American markets to carry earnings in the first quarter.

In terms of profitability, we think Groupon will report strong growth in adjusted EBITDA, helped by its productivity initiatives in the goods  and international businesses. We will closely track Groupon’s success against its growth strategies of rolling out new product innovations, driving pull in the marketplace, adding higher quality merchants, and improving customer experience in the quarterly results, as we think these are critical for its long-term growth.

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Check out our complete analysis of Groupon

Divestiture Of Ticket Monster Will Bring Down Revenue Growth Rate

Recently, Groupon announced the sale of 46% controlling stake in Ticket Monster (its South Korean online commerce business) to a partnership (comprising KKR and Anchor Equity Partners) in a deal valued at $360 million. The company is expected to gain between $195 million and $205 million on a pre-tax basis from the sale, and will retain 41% stake in TMON (on a fully diluted basis). While this transaction is forecast to close in Q2 2015, TMON will be considered a discontinued operation in the financial results of Q1 2015. We expect this development to significantly impact top-line growth in Q1 2015 — as the management lowered its revenue guidance for Q1 from $815 million to $745 million (at the mid-point). However, we also expect this divestiture to positively impact profitability as TMON accounted for significant operating losses in the previous quarters.

Gross Billings Growth Could Be Broad-Based Across Categories

We expect gross billings increase to be broad-based across the local, goods and travel businesses during Q1 2015. In addition, we also forecast continued acceleration in the North American local business as the major headwinds pertaining to email decline and redemptions have subsided. Though the gross billings could rise at a strong rate in North America and EMEA, its growth could falter in the rest of the world geography owing to the divestiture of TMON business.

Key Profitability Initiatives Will Be Monitored

Groupon’s initiatives to raise its margin profile in the goods’ business and international markets could continue to gain traction during the first quarter. In North America, the company has multiple thrusts to improve porfitability.  It is moving additional business to drop-shipping, striving to increase the number of units per order, and augmenting its fulfillment capacity.  All of these measures will help increase its goods margin to north of 10% in Q1, in our view.

And in the ‘rest of the world’ geography, Groupon’s efforts to standardize its best practices globally, coupled with the recent sale of TMON, could lead to positive adjusted EBITDA during the quarterly results.

Growth Strategies Could Show Progress

We forecast that Groupon will report progress against its strategies of launching the Pages and G.Nome features during the quarterly results. Pages help create an online identity for local merchants with useful information (including contact details, reviews and maps). Though over seven million such pages have been built, only a fraction of them have been released publicly. Additionally, the G.Nome product provides merchants with a new operating system to track item-levels sales and also allows for easier redemption by consumers. We will closely track qualitative information pertaining to the impact of these two new features on the traffic and engagement on the platform. We believe these efforts will help raise the share of organic search traffic on the company’s business in North America. Additionally, we think these efforts should also enhance Groupon’s popularity among merchants in the long-run.

We will revise our $8.01 price estimate for Groupon’s stock, post the earnings release.

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