Groupon’s Stock Rallies On Strong Earnings, Robust Outlook For Q4

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Groupon (NASDAQ:GRPN) announced its third quarter results on Wednesday, November 1, reporting an 8% year-over-year decline in net revenue to $634 million. In recent quarters, the company has exited certain low-performing international markets, due to which it reported a decline in revenues. While revenues were down, the company reported a 6% increase in gross profit to $309 million.

We are in the process of revising our $4 price estimate for Groupon, which is over 20% lower than the current market price. After a strong set of quarterly results and positive guidance for Q4, Groupon’s stock price rallied almost 10% to over $5 on Wednesday.

See our complete analysis for Groupon here

September Quarter Highlights

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. Subsequently, Groupon’s net revenues have fallen on a year-over-year basis, as shown below. Groupon’s management mentioned that the declining trend in revenues is expected to continue in the near term. Groupon’s management indicated that international segment revenues are expected to pick up beginning 2018.

Despite revenue declines in recent quarters, Groupon has improved gross profit margin due to lower customer acquisition and retention costs in addressable markets. In the September quarter, Groupon’s gross profit increased 6% over the year-ago period to $309 million. As a result, the company’s gross profit margin expanded by almost 6 percentage points, as shown above. This resulted in Groupon’s operating loss (GAAP) falling to around $1 million, compared to almost $23 million in the comparable prior year period. Similarly, the company reported net income of $59,000 for the quarter, up from a negative net income in the last six quarters.

Major Growth Metrics

The total number of active users on a trailing twelve month (TTM) basis increased 8% to 49.1 million by the end of the June quarter. However, TTM gross billings per active customer were down 6% to $120. While the company has sustained its growth spree in North America, its billings in international markets remained low through the year.

Furthermore, Groupon’s take rate, or the percentage of transaction value (gross billing) kept by Groupon, also fell by around 4 percentage points to 55%. This has also been a prevalent trend in recent quarters. In the near term, billings and take rate for international markets will likely remain low. However, the company’s billings and take could pick up in the long run and add to its profitability.

 

December Quarter & Full Year Expectations

Groupon guided for Q4 revenues to come in around 9% lower on a y-o-y basis to $850 million. As a result, full year revenues are expected to be around 9% lower at just over $2.8 billion. However, gross profit for the full year is expected to only around 6% lower than 2016 at $1.3 billion, resulting in a 150 basis points improvement in gross margin. Groupon further raised its 2017 full year operating income guidance on the recent earnings call in light of expected marketing investments and cost benefits associated with the company’s streamlining initiatives. Yahoo Finance consensus estimate for the company’s full year EPS stands at 12 cents per share, compared to 4 cents a share in 2016.

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