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Groupon (GRPN) Falls on Q1 Loss, Revenues Beat Estimates

Groupon Inc. GRPN reported better-than-expected results for the first quarter of 2016. The reported loss was lower than expected. Also, revenues exceeded expectations. However, apparently, investors were not happy with the performance as reflected in a decline of more than 6% in shares in the after-hours trading session yesterday.

Adjusted loss (including stock-based compensation, acquisition-related expenses and tax impact) came in at 6 cents per share, which compared favorably with the Zacks Consensus Estimate of a loss of 8 cents per share. However, it was greater than the year-ago quarter loss of 1 cent per share.

Revenues

Revenues of $732 million beat the Zacks Consensus Estimate of $708 million but declined 2.5% on a year-over-year basis.

Region-wise, revenues from North America increased 4.4% from the year-ago quarter while that from EMEA and the Rest of World (Asia-Pacific and Latin America) declined 12.6% and 22.2% year over year, respectively.

Gross billings dropped 5.2% year over year to $1.5 billion in the quarter. Region-wise, billings from North America increased 4.8% year over year. However, billings from EMEA and the Rest of World declined 14.6% and 28.2% year over year, respectively.

As of Mar 31, 2016, its active customers increased 2.7% year over year to 49.4 million, with 26.9 million customers in North America, 15.3 million in EMEA, and 7.2 million in the Rest of World.

At the end of the quarter, on an average, active deals were about 700K globally while those in North America rose to 425K.

Groupon’s operating expenses rose 13% year over year to $386.7 million.

Loss from continuing operations was $45.6 million compared with $16.7 million in the year-ago quarter.

The company repurchased about 18.8 million shares in the quarter for $63.4 million. The company has also expanded its share repurchase program by $200 million valid through Apr 2018.

Balance Sheet and Cash Flow

Groupon exited the quarter with cash and cash equivalents worth $688.5 million compared with $1 billion as on Dec 31, 2015. Cash used in operating activities in the quarter was $76.7 million in contrast to cash flow of $43.6 million reported in the prior-year quarter.

Free cash outflow was $96.7 million in the quarter.

Outlook

For 2016, the company continues to expect revenues between $2.75 billion and $3.05 billion. Adjusted EBITDA for 2016 is now projected to be between $85 million to $135 million (earlier expectation was $80 million and $130 million).

Our Take

Groupon is now undergoing a business transition as it shifts its focus from rapid international expansion to developing local core business. After a sluggish performance in 2015, the company finally found a new growth track when CEO Rich Williams took over the helm in Nov 2015. His novel business strategy (with core focus on marketing, international and shopping) appears to be working for the company. Its performance has started to improve since the last quarter wherein it beat expectations on both counts.

Furthermore, the company got a boost in Feb 2016 when Alibaba purchased about 33 million shares or a 5.6% stake in Groupon. Earlier in April, the company also received another $250 million investment from Atairos Management, a private investment firm backed by Comcast CMCSA.

However, Groupon is investing quite a bit in the transition, which is expected to affect its near-term financials. Moreover, along with the restructuring, the company is also trying to revive a part of its daily deals business (through various offerings for merchants), which was not the part of the restructuring program.

Apart from significant competition from giants like eBay and Amazon.com AMZN, Groupon is entangled in a few lawsuits, which remain a headwind. In February, IBM Corp. IBM had filed a patent infringement case against the company.

Groupon carries a Zacks Rank #3 (Hold).

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