Groupon Earnings Takeaways: Strong Performance In North America

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Groupon‘s (NASDAQ:GRPN) stock rallied after it reported strong fourth quarter earnings last week, with both revenue and adjusted profits beating market expectations. Groupon reported a 9% year-over-year (y-o-y) growth in revenue to $917 million, against market estimates of $855 million, driven by solid growth in North America. Adjusted earnings were 4 cents per share against consensus estimates of a break even.

With Rich Williams as the new CEO, Groupon is undertaking a series of bold measures such as significantly raising marketing investments, restructuring international portfolio and moving away from certain low-margin goods businesses. These are seeming to pay dividends, at least in the North American market which contributes over two-thirds of total revenues and about 60% of both gross billings and gross profits. In full year 2016, Groupon expects revenue of $2.75-$3.05 billion and adjusted EBITDA to range between $80 million and $130 million. [1] [2]

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North America Outperforms Other Regions

Gross billings, which reflect the amount of customer purchases, rose by 4.5% y-o-y to $1.7 billion globally on a constant currency basis during the fourth quarter of 2015. While gross billings rose by 11% in North America, they declined by 2% in EMEA and almost 7% in the Rest of World region. In full year 2015, North America again was the outstanding performer with gross billings growing 12.5% y-o-y and even EMEA showing positive growth of over 3%, both in FX neutral terms.

In terms of profitability, North America gross profit grew 12% y-o-y to $219 million in the fourth quarter. Shopping margins in the region improved to 10.3% with the company moving away from low-margin offerings. This also led to an increase in service margins, where the local take rate increased to 34.7% and discounts as a percentage of billings declined by 160 basis points y-o-y.

However, the ongoing restructuring and increased marketing spend in the region for new customer acquisitions and activations led to an operating loss of $2.5 million in North America in Q4 2015 compared to an operating profit of about $31 million in the prior year quarter. The company plans to continue its high marketing spend in the region in the first half of 2016 and expects returns on its investments in the latter half of the year in the form of more billings as well as new active customers.

Groupon’s active customer growth mirrored the trend observed in its global gross billings. The number of active customers grew by 7.5% and 1% y-o-y in North America and EMEA, respectively, while they declined by 6% in the Rest of World segment. The number of active customers currently stand at about 49 million, including almost 26 million in North America.

Fall In Billing Per Customer

A spot of bother for Groupon is its gross billings per average active customer, which declined from $137 per year in Q4 2014 to $130 in Q4 2015. In terms of geographical spread, this metric was largely flat y-o-y for North America in Q4 2015 but declined by about 16% and 9% in EMEA and Rest of World, respectively.

We are in the process of revising our $4.2 price estimate for Groupon’s stock

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Notes:
  1. Groupon Earnings Release, Feb 11 2016 []
  2. Groupon Q4 2015 Earnings Transcript, Seeking Alpha, Feb 11 2016 []