Groupon Earnings Preview: Focus On High-Performing Regions To Enhance Profitability

Groupon (NASDAQ:GRPN) is scheduled to announce its Q2 2017 earnings on Wednesday, August 2. In recent years, Groupon’s international operations have weighed on the company’s profits considerably due to higher marketing and promotion expenses. Moreover, high customer acquisition costs have not translated into high returns for Groupon, with gross billings per customer remaining low in regions outside North America and western Europe. As a result, Groupon’s management has made tough decisions to exit many markets over the last few quarters, thereby reducing its potential addressable market size. However, 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.

Below we take a quick look at expectations from Groupon’s Q2 results, the company’s full year guidance as well as some key growth metrics for the company’s operations. We have a a $4 price estimate for Groupon, which is slightly higher than the current market price. Groupon’s stock price is down almost 30% in the last year.

See our complete analysis for Groupon here

Groupon Q2 & Full Year Expectations

Groupon’s net revenue for the June quarter are expected to be 9% lower than the comparable prior year period at around $690 million, per consensus estimates compiled by Reuters. In addition, Reuters’ consensus estimates forecast Groupon to report net income of around 1 cent per share as compared to a net loss of 1 cent per share in the June quarter of last year.

For the full year, Groupon’s net revenue could be around 8% lower than 2016 at $2.9 billion. Groupon’s management expects gross profit of $1.3 billion, which would be 7% lower on a year-over-year basis. However, its gross profit margin is expected to expand by 50 basis points to 45.7%, as shown above. Moreover, disciplined expense management – as well as shutting operations in various markets – could help lower losses and increase operating profit. As a result, Groupon’s adjusted EBITDA is expected to be in the $200-240 million range, according to the company’s own estimates. This could help Groupon’s adjusted EBITDA margin to improve by almost 2 percentage points to 7.6% for the full year. In addition, Groupon’s net income per share for the full year could be almost 175% higher on a y-o-y basis to 11 cents a share, according to consensus estimates complied by Reuters.

Key Business Metrics & Growth Areas

• 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. Groupon North America revenues grew at a CAGR of 9% from 2014 through 2016, while the company’s net revenues declined at a CAGR of 1%.
• The company’s gross billings and gross profits have increased in North America, owing to its strategy to focus in the region and move away from certain low-margin goods businesses, particularly outside of North America and Western Europe.
• The renewed focus on North America led to an addition of over 5 million customers in 2016. This trend continued in Q1’17 with an addition of 500,000 unique customers during the quarter.

• Although the total spend by each customer was fallen in recent years, Groupon’s “take rate,” or the percentage of transaction value (gross billing) kept by Groupon, has increased. We forecast this figure to remain at around 55% through the end of our forecast period.

• On the other hand, 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.
• The company spent more on marketing in order to improve performance in poorly performing markets. 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.

• Groupon has barely reported a profit (non-GAAP) over the last few years since its IPO. Groupon’s market price has fallen from its IPO price of over $20 to low single digits in recent years.
• As a result, Groupon’s management has made strategic decisions to shut down operations in many countries in order to improve profitability. Groupon was operating in almost 50 countries a couple of years ago, and that figure is now down to 15 countries.
• Over the next few quarters, Groupon’s general and administrative are expected to fall, mainly driven by cost cutting efforts by the company, including reducing its headcount. In addition to lower employee expenses, reduced marketing expenses could help in improving operating profits.

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