Groupon Lags Estimates

Groupon Inc. ( GRPN - Snapshot Report ) reported loss per share of 5 cents (including stock-based compensation but excluding non-operational loss of 47 cents) in the fourth quarter 2012, which was wider than the Zacks Consensus Estimate of a loss of 2 cents per share. The non-operational loss was associated to the impairment of a cost method investment in China.

However, when compared on a year-over-year basis, loss per share improved from 8 cents incurred in the year-ago quarter. This improvement was primarily due to higher revenue base.

Quarter Details

Though revenues increased 29.7% year over year to $638.3 million, it marginally missed the Zacks Consensus Estimate of $639 million. Sequentially, revenues were up 12.3%.

Region-wise, revenues from North America was up a staggering 108.9% year over year to $375.4 million, aided by robust direct and third-party revenues. However, Groupon’s international revenues decreased 15.9% year over year to $262.9 million due to lower direct revenues.

The strong year-over-year revenue growth was primarily due to higher gross billing, which increased 23.5% year over year to $1.52 billion in the reported quarter. This year-over-year growth can be attributed to a steady increase in the number of active customers, which stood at 41 million as of Dec 31, 2012.

In North America, Groupon’s active customer count grew 22% year over year to 17.2 million and its international customers count jumped 21% to 23.8 million.

The company reported an operating loss of $12.9 million, which was narrower than $15 million lost in the year-ago quarter. Sequentially, the company’s loss widened from a profit of $27.9 million, primarily due to growth in the lower margin direct business and investments to expand local merchant base.

Net loss (including stock-based compensation but excluding non-operational loss was associated to the impairment of a cost method investment in China) came in at $30.5 million, which was narrower than a loss of $42.2 million in the year-ago quarter.

Groupon exited the fourth quarter with cash and cash equivalents worth $1.21 billion and the company had no debt. Cash flow from operating activities was $65.7 million while free cash flow was $25.7 million at the end of fourth quarter.

Outlook

For the first quarter of 2013, Groupon provided a tepid outlook. The company forecasts revenue to increase in the range of 0% to 9% to $560 million to $610 million, lower than the Zacks Consensus Estimate of $646 million.

Groupon expects operating income to be in the range of ($10.0) million to $10.0 million for the first 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.

However, we believe that the market is getting more competitive due to the growing interest from technology stalwarts such as eBay ( EBAY - Analyst Report ) , Amazon ( AMZN - Analyst Report ) and Google ( GOOG - Analyst Report ) . Moreover, a volatile macro economic environment and continued investments to expand its merchant base are expected to impact results in the near term.

Currently, Groupon has Zacks Rank #3 (Hold).