What To Expect From Groupon’s Q3 Results

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Groupon (NASDAQ:GRPN) is scheduled to report its earnings for the third quarter of 2016 on Wednesday, October 26th. The company reported solid financial results in the second quarter, with both revenue and adjusted profits beating market expectations. Groupon reported 2% year-over-year growth in revenue to $756 million, against market estimates of $711 million, driven by solid growth in North America. Its adjusted loss was 1 cent per share against consensus estimates of a loss of 2 cents per share.

In the upcoming Q3 results, overall sales are expected to decline driven by declining international gross billings owing to its strategy to focus on the North American market and move away from certain low-margin goods businesses. Groupon is expected to report revenues of around $690 million and a loss of $0.02 per share in Q3 2016, per consensus estimates compiled by Reuters. For full year 2016, Groupon expects revenues of $3.0-$3.1 billion and adjusted EBITDA to range between $140 million and $165 million.
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What To Watch Out For:

  • North America Revenues
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North America, which has been the primary area of focus for the company, reported revenues of about $517 million in the second quarter, an increase of 7% on a year-over-year basis. Gross billings for the region improved by 7.8% over the prior year quarter to $966 million while gross profits increased 10% year over year to $217.2 million. The renewed focus on North America led to an addition of 1.1 million customers during Q2 2016, which was the company’s best performance in the past nine quarters. For Q3 2016, we expect North America revenue to report growth in mid-single digits even as international sales continue to decline.

  • Marketing Expenses

In the first half of the year, Groupon’s revenues grew 1% year over year to $1.5 billion, but its net loss increased to $104 million owing to significantly higher marketing expenses. grpn-24

Considering the company is moving away from lower-margin businesses in international markets, we assume that most of its marketing expenses are spent in the North America and EMEA regions. Incorporating this in our calculations, the company’s marketing expenses increased from $110 million (8% of (North America+EMEA) revenues) in the first half of 2015 to $145 million (9.5% of revenues) in the second half of 2015, and to $182 million (13% of revenues) in the first half of 2016. We will keep an eye on this metric in the upcoming third quarter results.

  • Active Users

Groupon’s growing marketing spend helped increase its active users from 40.2 million at the end of June 2015 to 42.7 million at the end of June 2016.grpn-17

The effectiveness of Groupon’s marketing expenses can be gauged from the fact that the marketing spend per new user declined from over $44 in the second half of 2015 to $21 in the first half of 2016. This data suggests that Groupon’s current focus seems to be on increasing its active customer base rather than improving individual customer sales. It will be interesting to see how this metric changed in the upcoming third quarter results.

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