How Much Will International Business Contribute To Groupon’s Top Line Growth?

GRPN: Groupon logo

Groupon (NASDAQ:GRPN) has gone through some major restructuring in recent years, with the company narrowing its operations from almost 50 countries in 2015 to around 15 currently. The company took these steps in a attempt to boost profits, as it had barely reported a profit in the few years following its IPO, with a GAAP net loss in 3 of the last 5 years. As a result, Groupon’s market price has fallen from its IPO price of over $20 to low single digits in recent years. However, after exiting loss-making markets, Groupon’s margins have improved and its international segment has shown positive revenue growth through 2017 and the current year thus far.

The revenue declines in North America are likely to continue this year, due to lower billings after the company ceased its food delivery operations last year, coupled with the shift of business model from the traditional voucher based offerings to the voucherless Groupon+ service model. It could take a couple of years for revenues to start increasing again. On the other hand, we expect the international segment to continue to help Groupon’s top line growth through the end of the decade. For the current year, we expect Groupon’s net revenues to stand at $2.72 billion, around 4% lower than the previous year. Over the next couple of years, we expect revenues to increase by low single digits to over $2.86 billion through 2020. We forecast the international segment to add nearly $90 million to net revenues in this period, which is roughly 70% of the expected total revenue growth. We have created an interactive dashboard for Groupon’s international segment, where we have summarized our revenue growth expectations. If you disagree with our forecasts, you can change the key drivers including individual segment revenue for Groupon to gauge how changes will impact the segment contribution.

Factors Driving Growth In International Segment

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In an attempt to improve performance in poorly performing markets, the company exited many markets in recent years. In addition, the company has consistently increased its total expenditures on marketing in the remaining markets. Groupon’s reported marketing expenses increased from $269 million in 2014 to $401 million in 2017 – an annual growth rate of 14%. The increased marketing efforts and order discounts have had a positive impact on Groupon’s customer base as well gross billings on organic basis. However, It is important to note that active customers in the international segment fell from 22 million in 2016 to 16.6 million in 2017 due to the exited markets.

On a positive note, gross billing per customer increased from $80 in 2016 to $103 in 2017. This was expected since the company exited markets in which it didn’t have a huge presence. We expect this metric to gradually increase to around $110 by the end of the decade. Another main advantage for the company narrowing operations to fewer countries is that its implied average take rate jumped from 49% in 2016 to 54% in 2017. We expect Groupon’s take rate to increase to 56-57% over the next few years. In addition, we expect the average active customers to increase gradually to around 17.5 million in the same period.

Through the first half of the current year, total gross billings in international markets have increased 10% on a y-o-y basis. As a result, revenues have increased 14% through the first half of the year to $470 million. We expect Groupon to continue to perform well in international markets this year, with revenues expected at just over $1 billion. Over the next couple of years, we expect gross billings to increase to $1.9 billion by 2020. We expect a take rate of 57% for 2020, resulting in revenues of $1.1 billion.

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