What Does The Future Hold For Groupon’s International Business?

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Groupon

Groupon (NASDAQ:GRPN) is undergoing some major restructuring, as it has been exiting some key markets for a while now. Groupon was operating in almost 50 countries a couple of years ago, which is now down to 15 countries. The company has taken these steps in a attempt to boost profits. Groupon has barely reported a profit (non-GAAP) over the last few years since its IPO. Groupon’s net profits in the last three years were 4 cents, 8 cents and 8 cents a share, respectively. Groupon’s market price has fallen from its IPO price of over $20 to low single digits in recent years.

See our complete analysis for Groupon here

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Groupon: Business Overview

Groupon North America is the largest segment by revenue for the company and is also the only segment reporting top-line growth in recent years. Over the same period, Groupon’s operations in Africa, Asia-Pacific, Latin America and sections of Europe have not performed as well. Total revenues generated from EMEA and Rest of the World segments have both fallen in recent years, as shown below. As a result, Groupon’s management has taken strategic decisions to shut down operations in many countries.

Groupon Thriving In North America

The region has been the primary area of focus for the company in recent years. Groupon North America’s revenues as well as profits have improved in recent years owing to the company’s strategy to focus on the North American market and move away from certain low-margin goods businesses. The renewed focus on North America has led to the addition of new customers in recent quarters. The total number of active users has risen by 17% since 2012 to almost 29 million customers in 2016.

Although the total spend by each customer was down 3% y-o-y, the “take rate,” or the percentage of transaction value (gross billing) kept by Groupon, increased by 6 percentage points to 55%, as shown below. As a result, the reported revenues grew at a CAGR of 17% in the period to over $2.1 billion.

Groupon International

Groupon’s gross billings as well as gross profits declined in international markets in recent years. Groupon EMEA (Europe, Middle East and Africa) generated $827 million in revenues in 2016, only marginally higher than $805 million in 2012. However, revenues were significantly lower than $961 million in 2014. The recent decline in segment revenues can be attributed to certain markets not performing well. In an attempt to improve performance in poorly performing markets, the company has spent more on marketing. Groupon’s reported marketing expenses increased from $269 million in 2014 to $363 million in 2016 – an annual growth rate of 16%. However, the increased marketing efforts and order discounts had more of an impact on Groupon’s customer base than gross billings.

The gross billings per customer in the EMEA region fell from almost $160 in 2012 to just over $100 in 2016, an annual decline of 10%. As a result, the company recently shut operations in Denmark, Sweden, Finland and Norway. Late last year, the company reported that it has also stopped its operations in South Africa, Morocco, Turkey, Ukraine, Portugal, Switzerland and Austria.

On the other hand, the total number of users on Groupon’s websites in Asia and Latin America have consistently fallen over the last few years, as shown below. The gross billing per customer and Groupon’s take rate in these markets are significantly lower than North America and Europe. Moreover, both gross billings per customer and Groupon’s take rate have shown a declining trend in recent years. As a result, Groupon has exited markets such as India, Indonesia, Russia, Malaysia, Uruguay, Panama, Puerto Rico, Thailand, Taiwan and Hong Kong.

Conclusion and Future Outlook

Groupon has brought down its international presence to streamline its operations. The company intends to primarily focus on certain high-performing regions across North America and Europe. This reflected positively in the company’s most recent earnings. Groupon’s general and administrative expenses declined by 12% y-o-y in the quarter ending March 2017, mainly driven by cost cutting efforts by the company, including reducing its headcount. For the full year, Groupon expects its gross profit to be roughly flat over the previous year at around $1.3 billion. On the other hand, lower marketing and employee expenses could lead to an improvement in operating profits. Groupon’s management expects adjusted EBITDA to be around $220 million for the full year, up from $140 million in 2016. Subsequently, we forecast Groupon’s EBITDA to continue to improve.

With presumably lower order discounts and relatively lower new customer acquisition costs in markets Groupon intends to stay in, the company is seemingly on course to improve profitability in the long run. However, the company has moved away from many international markets, thereby reducing its potential addressable market size.

We have a a $4 price estimate for Groupon, which is around 10% higher than the current market price. Groupon’s stock price is down almost 30% in the last year. You can modify the interactive charts in this article to gauge how changes in individual drivers for Groupon can have on our price estimate for the company.

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