Groupon and the Third-Quarter Miss

Published on November 8, 2012
by Tricia Duryee

Groupon’s shares are plunging this afternoon after the daily deals company reported less-than-stellar results.

We’ll be liveblogging the company’s conference call at 2 pm to hear what the Chicago company’s management team, including CEO Andrew Mason and CFO Jason Child, has to say about its performance.

Analysts will be eager to hear about the company’s growth prospects.

Over the past few months, the company has shifted from selling super-lucrative coupons to lower-margin products. In just one year, Groupon said its Goods category, which sells everything from linens to jewelry, has reached an annual run rate of nearly $1.5 billion in global billings and nearly $500 million in revenue. But how profitable is it?

Groupon is also rolling out services for local business, such as mobile payments and scheduling tools, that are designed to increase a merchant’s loyalty to the company, but not necessarily make a huge profit.

The call should be starting any minute, so answers to those questions and more coming up next.

2:02 pm: Call is kicking off with all the usual comments about forward-looking statements.

Andrew is up first, acknowledging right off the bat that they missed revenue expectations.

Here are some of the major themes: Mason wants us to dig below the surface. They are investing in mobile and obsessing about customer and merchant satisfaction. They are more diverse than ever by expanding from daily deals into Goods.

2:10 pm: Mason says that Europe has become a real problem, and that they weren’t able to update all the systems there before growth started to plateau. He says Kal Raman, who joined a few months ago, is now squarely focused on addressing international issues. “In the fourth quarter, we are confident that they are on a path to turning things around.”

Now switching to the company’s core daily deals business, Mason asks: Has local reached a limit?

“We don’t look at email as our only growth channel. It’s about surprising and delighting customers with a curated list of products and services.” Goods fits perfectly in that value prop, he said, and helps to secure more engagement by consumers.

On the subject of growing its local business vs. high-quality deals in as many categories as possible: “We have to go beyond the in-box, so customers can pull deals, wherever or whenever.”

Masons says they are doing this through Deal Bank, which allows for a bigger selection.

But you can only put so many deals in each email, he says. Launched this week, you can now browse for or search deals in Chicago. “Today, you buy when you see a good deal. Now, you can go to Groupon when you are looking for something, an oil change, housecleaning or when traveling and looking for a good meal.”

2:14 pm: “Our email business is about fresh variety,” he says. “And while we believe our local email business will grow,” he says growth will come from “breaking out of the in-box” by tapping into traditional e-commerce methods, like search and browse.

He says that he doesn’t want to out-Amazon Amazon. It will never be about having everything, but rather selected deals.

2:14 pm: We are particularly optimistic about the broader search opportunity because a quarter of queries on Bing and Google are for local items, Mason says.

Groupon operating system, which includes payments and scheduling and rewards. “Our unique relationship with them gives us the opportunity to deliver more simple tools. It makes Groupon a true partner for their administrative teams. This long-term initiative is critical in building our marketplace.”

2:16 pm: CFO Jason Child now takes a turn on the line, going through the company’s financials in more detail.

He reminds us that the company is coming up on its fourth anniversary! Groupon is a baby! Mind you, it now has also passed its first birthday as a publicly held company. It hasn’t gone so well. After selling shares for $20 apiece in the IPO, shares are now trading at $3.23 a share, after today’s release.

2:27 pm: Mason comes back to summarize. “Merchant satisfaction is high and we have increased our market position. Internationally, fast growth has led to some execution issues,” he says. However, Groupon is implementing their domestic playbook internationally to put it on track to grow revenue in Q4.

Q&A time.

2:31 pm: A question about customer behavior.

Mason says: We had a decline in gross billings per average active customer, driven by the trend in Europe. In North America, it was due to an increase in sales at a lower price point. We have 40 million active customers, which is a small percentage of Internet users, so the opportunity to grow is still tremendous. We are focused on doing that through new channels: Mobile, search engines and the recently launched site that is searchable.

2:38 pm: Another analyst asking about customers.

Mason responds: Our rate of new activations have been increasing, from the first month of Q3 to the last month of Q3, and those numbers are holding in Q4.

“Groupon is only participating in a fraction of a percent of local commerce. We don’t think that the best way to reach customers is sending them an email every day and guessing what they want to do,” he says, adding that they want to reach customers in entirely new ways by creating a marketplace. “We think that will be a growth driver for us next year,” he added.

A question about the impact that Superstorm Sandy had on its business. Child says the overall impact has not been significant. “It’s less than a 1 percent impact to billings, and it is built into our guidance,” he said.

2:46 pm: An analyst wants to know about the company’s new operating system services, like mobile payments, and how they are doing.

No numbers to report, Mason says: “They are nacent businesses for us. We think of these services not as near-term growth drivers, but as indirect growth drivers, by creating a more sticky experience for running deals on Groupon. Merchants have been extremely pleased in results so far.”

2:51 pm: A question about the size of its sales force, and the overall employee headcount (a.k.a., will there be layoffs?).

Mason hedges, but sounds like fewer people are needed to accomplish the same tasks as before: “For the first three years, most of our innovations were focused outward toward merchants and customers. In the past six to nine months, we’ve started looking inward to automate manual processes. Before, we used people even if it wasn’t the most productive or efficient. Now we’ve started releasing tools, and I’ve talked in the past, about the need for people to copy and paste deal information. That’s allowing us to scale without adding headcount. We’ll get operating leverage in the future — that’s all I can say about that for now.”

Q&A is over, and no concluding remarks, so that’s it. You may now disconnect.

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