Reviewing Groupon’s 2017 Across Segments And Geographies

by Trefis Team
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The last eighteen months have been eventful for Groupon (NASDAQ:GRPN) as the company has undergone some major restructuring. Groupon’s management took a bold decision to exit some key markets in recent quarters. Groupon was operating in almost 50 countries a couple of years ago, a figure which is now down to 15. In terms of financial reporting, the company has clubbed its EMEA and Rest of the World segments into a combined International segment. The company took these steps in an attempt to boost profits, and it has largely been a success thus far.

We maintain our $4.50 price estimate for Groupon, which is around 15% lower than the current market price. Groupon’s market price has fallen from its IPO price of over $20 to low single digits in recent years. However, its stock has risen by over 60% this year, from $3.30 at the beginning of the year to $5.40 currently. We remain conservative with our estimate, but you can modify the interactive charts in this article to gauge how changes in individual drivers for Groupon can affect our price estimate for the company.

See our complete analysis for Groupon here

Financial Performance

Groupon’s net revenue has fallen 7% on a y-o-y basis with direct revenues taking a hit this year. Meanwhile, third-party and other billings and revenues offset the decline from direct revenues. Since the company exited some loss-making markets in recent quarters, its gross margins have picked up. As shown below, the company-wide gross margin (GAAP) was up by over 4 percentage points through the first three quarters of the year.

Improved gross margins through the year also led to an improvement in operating income and net income, as shown above. Although the bottom line remains in the red on a GAAP basis, net income and diluted earnings per share were positive for the three quarters combined on a non-GAAP basis.

Segment Growth Metrics

Groupon’s third-party and other revenues combined were up 4% over the comparable prior year period to $920 million. These revenues are generated on transactions for vouchers sold by Groupon that are subsequently redeemed for goods or services with third-party merchants. Third-party revenues, particularly for both goods and travel, were up in North America but declined in international markets.

It is interesting to note that the third-party business has performed well in North America, while direct sales have been the key growth driver in international markets. Accordingly, margins improved in North America and compressed in international markets, as the third-party business has significantly higher margins.

Despite lower gross billings for the third-party stream in the international segment, Groupon has performed well in terms of direct sales in North America. The renewed focus on strong-performing geographies (North America and Western Europe) has led to new customer additions in recent quarters. The total number of active users at the end of the most recent quarter has risen by over 7% this year to over 49 million customers this year on a trailing twelve month (TTM) basis. However, direct revenues in North America were down significantly this year, due to the company de-emphasizing some low-margin businesses in the region. As a result, the company’s North American gross margin was up over 7 percentage points despite a 24% annual decline in North America direct revenues to $666 million.

Groupon has reduced its international presence in order to streamline its operations. The company intends to primarily focus on certain high-performing regions across North America and Europe. As a result, the company’s gross billings for the third party goods business in the international segment have fallen in recent quarters.

The company’s plan to focus on high-performing markets has reflected positively in its earnings this year. Groupon’s selling, general and administrative (SG&A) expenses have fallen by over 10% y-o-y to just under $677 million through the first three quarters of the year, mainly driven by its cost-cutting efforts by the company, including reducing its headcount. As a result, the company has reported positive an improvement in operating income and net income (table on top).

With presumably lower order discounts and relatively lower customer acquisition costs in markets in which it intends to stay, Groupon looks to be on course to improving its long-term profitability. However, the company has moved away from many international markets, thereby reducing its potential addressable market size.

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