Groupon’s Revenue Declines Likely To Continue In Q4, Margins Should Improve

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Groupon (NASDAQ:GRPN) is scheduled to report its Q4 and full year 2017 earnings on February 14. The last several quarters have been eventful for the company, which 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.

The company has given modest guidance for Q4, which we have summarized on our interactive analysis platform. You can change expected revenue, gross margin and income margin figures for Groupon to gauge how it will impact expected EPS.

See our full analysis of Groupon

December Quarter & Full Year Expectations

Groupon guided for its Q4 revenues to come in around 9% lower on a y-o-y basis to $850 million. As a result, full year revenues are also 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 point 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.

Segment Growth Metrics

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. Comparatively, Groupon’s third-party and other revenues combined for the three quarters of 2017 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 higher margins.

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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