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Groupon Inc. (GRPN - Analyst Report) reported better-than-expected third quarter 2012 results with break-even earnings, which compared favorably with the Zacks Consensus Estimate of a loss of a penny. Third quarter results improved considerably from a loss of 18 cents per share in the year-ago quarter.

Quarter Details

Revenue was up 32.2% year over year to $568.6 million, which missed the consensus mark. Region wise, revenue in North America shot up 80.5% year over year to $291.6 million. Groupon’s international revenue increased 3.1% year over year to $277.0 million.

The strong year-over-year revenue growth can be attributed to higher gross billing, which increased 5.0% year over year to $1.22 billion in the reported quarter. This year-over-year growth can be attributed to a steady increase in the number of active customers, which surpassed 39.5 million as of September 30, 2012.

Groupon also gained strongly from increasing number of transactions on mobile devices. In North America, approximately one-third of the total transactions were conducted on mobile during the reported quarter.

A significant decline in marketing expenses, down 58.3% year over year to $71.0 million, helped Groupon to generate an operating profit of $27.9 million (including stock based compensation) compared to a loss of $5.0 million in the year-ago quarter.

Region wise, operating income from North American operations increased 108% to $198.4 million. International operations reported an operating profit of $11.4 million compared with a loss of $20.5 million in the year-ago quarter.

Groupon reported a net loss of $3.0 million compared with a net loss of $54.3 million in the third quarter of 2011.

As of September 30, 2012, Groupon’s cash and cash equivalent amounted to $1.20 billion and the company had no debt. Cash flow from operating activities was $42.1 million while free cash flow was $26.1 million at the end of third quarter.

Outlook

Groupon provided an optimistic outlook for fourth quarter of 2012. The company forecasts revenue to increase in the range of 27.0% to 37.0% and to remain within a range of $625.0 million to $675.0 million. Groupon expects operating income to be in the range of $0.0 million to $20.0 million for the fourth quarter, compared to a loss of $15.0 million in the year-ago quarter.

Our Take

We believe that Groupon is well positioned to gain from rising e-commerce spending on mobile devices, a profitable domestic market and an under penetrated international market. We expect these opportunities to continue to drive top-line growth going forward.

Moreover, accretive 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 needs to post profits consistently for the next couple of quarters to gain the 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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