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Groupon Inc. (GRPN - Analyst Report) reported better-than-expected first quarter 2012 results, with earnings of 2 cents per share (excluding stock based compensation) improving considerably from a loss of 41 cents per share in the year-ago quarter. Following the result, Groupon shares surged 18.54% to close at $11.74.

Including stock-based compensation of 4 cents per share; Groupon reported a loss of 2 cents, much better than the Zacks Consensus Estimate of a loss of 4 cents. Strong revenue growth and lower marketing expense drove the quarterly result.

Quarter Details

Revenue was up a staggering 89.0% on a year-over-year basis to $559.3 million. Region wise, revenue in North America increased 74.7% year over year to $238.6 million. Groupon’s international revenue shot up 101.8% year over year to $320.7 million.

The strong revenue growth can be attributed to higher gross billing, which increased 103.0% year over year to $1.35 billion in the reported quarter. This huge growth can be attributed to a steady increase in the number of active customers, which surpassed 35 million as of March 31, 2012.

Groupon also gained strongly from increasing number of transactions on mobile devices (50.0% of total transactions). Groupon Now!, the company’s mobile service is growing at a faster rate than the daily deals business, which will boost top-line growth going forward.

Customer additions for Groupon remained flat sequentially, despite a significant decrease in marketing spending. Most importantly, repeat purchasers grew 1.5 times faster than the number of unique purchasers, reflecting the addictive nature of the Groupon deals.

A significant decline in marketing expenses (21.0% of revenue; down from 78.0% in the year-ago quarter), down 49.3% year over year, helped Groupon to generate an operating profit of $39.6 million compared to a loss with $117.2 million in the year-ago quarter.

Region wise, operating income from North American operations increased 25.3% to $198.4 million. International operations reported an operating profit of $27.4 million compared with a loss of $76.5 million in the year-ago quarter.

Groupon reported a net income of $16.3 million compared with a net loss of $127.6 million in the first quarter of 2011. Including stock based compensation of $28.0 million but excluding acquisition related charges of $0.05 million, net loss was $11.7 million in the reported quarter.

As of March 31, 2012, Groupon’s cash and cash equivalent amounted to $1.16 billion and no debt. Cash flow from operating activities was $83.7 million while free cash flow was $70.6 million at the end of first quarter.

Outlook

Groupon provided an optimistic outlook for second quarter of 2012. The company forecasts revenue to increase in the range of 40.0% to 50.0% and to remain within a range of $550.0 million to $590.0 million. Groupon expects operating income to be in the range of $25.0 million to $45.0 million for the second quarter.

Our Take

After a tumultuous six-month period post initial public offering (IPO) in November 2011, it seems that Groupon is finally gaining some traction. We believe that Groupon is well positioned to gain from rising e-commerce spending on mobile devices, profitable domestic market and an under penetrated international market. We expect these opportunities to continue to drive top-line growth going forward.

Moreover, Groupon has been on an acquisition spree over the last couple of quarters as the company acquired a number of companies such as Uptake, Hyperpublic, Adku, and FeeFighters. These acquisitions are expected to boost Groupon’s position in the small and medium-size business (SMB) market, apart from expanding its technology and product portfolio.

Groupon enjoys a first-mover advantage in the daily deals market based on its well-recognized discount coupons. However, we believe that the market is getting more competitive due to the growing interest from technology stalwarts such as Amazon.com Inc. (AMZN - Analyst Report) and Google Inc. .

Moreover, we believe that Groupon need to post profits on a consistent basis for the next couple of quarters to gain confidence of its jittery investors. Until that happens, we prefer to remain Neutral on the stock over the long term. 

Currently, Groupon has Zacks #3 Rank, which implies a Hold rating in the short term.

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