A month has gone by since the last earnings report for Groupon (GRPN - Free Report) . Shares have added about 2.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Groupon due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Groupon Tops Q3 Earnings, Revenues Miss Estimates
Groupon Inc. reported mixed third-quarter 2018 results. The company delivered non-GAAP earnings of 4 cents per share, which beat the Zacks Consensus Estimate by a penny. Further, the figure increased from 1 cent reported in the year-ago period.
Revenues of $592.9 million declined 7% on a year-over-year basis (6% at FX neutral), lagging the Zacks Consensus Estimate of $603 million. The year-over-year decline can primarily be attributed to lower customer traffic.
The company has been trying to reduce dependence on goods deals and is shifting focus toward local services market. This is because local services market is a high margin business while goods deals bring in high revenues but smaller margins. The transition continues to hurt the company’s revenues as reflected in third-quarter results.
Service revenues (48.8% of total revenues) declined 4.4% year over year to $289.2 million. Product (51.2%) revenues slumped 8.5% to $303.7 million in the same period.
Region-wise, North America revenues (60.9% of total revenues) decreased 12.8% from the year-ago quarter to $361.2 million. Meanwhile, International revenues (39.1% of total revenues) increased 5.2% year over year to $231.7 million.
In the third quarter, billings from North America were $802.6 million, down by 13.6% year over year. However, international billings increased marginally 0.2% (1.8% excluding foreign exchange effect) to $413.6 million.
North America local gross billings came in at $534.2 million, decreasing 11.9%. Local revenues of $180.1 million declined 7.2% from the year-ago quarter. Further, goods billings and revenues fell 19.7% and 18.8% to $184.4 million and $163.9 million, respectively.
International local gross billings were $209.6 million, improving 3.3% (5% excluding foreign exchange effect). Local revenues of $75.9 million grew 6.1% from the year-ago quarter (7.8% excluding foreign exchange effect). However, goods billings decreased 1.2% year over year to $157.9 million. Meanwhile, revenues increased 5.4% to $146.4 million.
Groupon's online marketplaces have been categorized under three heads, namely Local, Goods and Travel. Consolidated revenues from Local (43.2% of total revenues), Travel (4.5%) and Goods (47.7%) declined 3.6%, 5.3% and 8.9%, respectively from the year-ago quarter.
Gross profit from Local was almost flat year over year and came in at $231 million, while Travel marketplaces gross profit declined 2.3% to $22.5 million. Gross profit in the Goods market declined 5.7% to $52.5 million.
As of Sep 30, 2018, Groupon had approximately 17.4 million active customers internationally compared with 17.1 million at the end of the previous quarter.
As of Sep 30, 2018, the company had approximately 31.4 million active customers based in North America compared with 32.2 million at the end of the previous quarter.
The company continues to take initiatives to bolster card linked offers platform and enrich customer experience.
Management noted that its new offering Groupon+ is being well received as the company is enhancing customer experience by investing in voucherless initiatives. During the reported quarter, the company had around 5.9 million cards linked in Groupon+.This is expected to be a catalyst going ahead.
The company’s partnership with Grubhub (GRUB - Research Report) continues to enable customers to order food delivery from more than 80,000 restaurant partners of Grubhub via Groupon platform.
Further, partnerships with CoreSource, American Express, Major League Baseball, among others are aiding Groupon to cater to just about any local need, consequently aiding it to rapidly penetrate the market.
The company recently, entered into an extended strategic relationship with MLBAM’s privately owned subsidiary, Tickets.com. Per the partnership, Groupon will be able to furnish robust ticketing experiences to major ticketing clients of Tickets.com.
With a proper mix of products and accelerating consumer activities, management anticipates growth going forward.
Gross profit during the third quarter came in at $306 million, down 1% (1% at FX neutral). Internationally, gross profit inched up 2% (4% on an FX-neutral basis) to $102 million. However, North America gross profit dipped 2% to $204 million.
Successful implementation of the company’s streamlining activities was evident from the year-over-year increase of 21% in adjusted EBITDA, totaling $56.4 million.
Global units sold during the quarter declined 11% year over year to 39.5 million, primarily due to lower traffic. North America units were down 17% year over year, primarily owing to the divestiture of certain OrderUp assets, continued investments in scaling Groupon+ and maximization of long-term gross profit.
SG&A expenses decreased 25.4% year over year to $160.2 million in the reported quarter. The decrease was mainly due to settlement litigation expense worth $40.4 million on International Business Machines lawsuit. Management noted that excluding the benefits litigation expense on IBM lawsuit, the metric declined 7% highlighting company’s efforts on improving operational efficiency.
Marketing expenses declined 9% to $92.7 million primarily due to optimizing spend in regard to high value customers.
Balance Sheet & Cash Flow
Groupon exited the quarter ending Sep 30, 2018, with cash and cash equivalents of $572.4 million down from $662.9 million, reported at the end of the previous quarter.
Net cash used from operations during the quarter came in at 57.4 million, compared with $44.2 million generated in the previous quarter.
Free cash flow came in at ($73.5) million in the third quarter compared with $26.8 million in the previous quarter.
For full year 2018, Groupon reiterated adjusted EBITDA guidance. The company maintains adjusted EBITDA outlook in the range of $280-$290 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -10.61% due to these changes.
Currently, Groupon has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Groupon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.