Groupon Misses Revenue Expectations, but Profits Beat

Groupon shares are moving lower as it misses top-line expectations for the second quarter, but beats on the bottom line.

The daily deals giant said adjusted earnings per share totaled 8 cents, excluding some items, on revenue of $568.3 million.

Shares immediately plunged in after-hours trading by 11.3 percent, but we’ll see if that tapers off as investors digest the news. Update: That’s not the case yet. Shares are now down around 15 percent to $6.37 a share, which is significantly below its IPO price of $20.

The Wall Street consensus was calling for Groupon to report a second-quarter profit of three cents a share, excluding some non-cash items, on revenue of $578 million. Adjusted earnings per share was boosted by a one-time gain of four cents in connection with the sale of a minority interest in its Chinese operations. Without that gain, the company would have beat consensus by one cent.

Internally, Groupon was projecting revenues between $550 million and $590 million, representing year-over-year growth of 40 to 50 percent. Income from operations was expected to fall between $25 million and $45 million, compared to a loss of $101 million in the second quarter of 2011.

Groupon said revenue increased 45 percent year over year, but would have been as good as 53 percent if the impact of foreign exchange was eliminated. Analysts are concerned about the company’s growth rate slowing, and were expecting sales to grow by 49 percent. In the first quarter, Groupon saw revenues double compared to the same period in 2011.

When using strict accounting methods, using GAAP, the company said it earned a profit of $28.4 million, or 4 cents a share.

Other highlights from the quarter:

  • North American revenues grew 66 percent year over year.
  • Groupon Goods surpassed the $200 million annual revenue run rate in the second quarter 2012, in just its third quarter since launch in North America.
  • In July 2012, nearly one third of North American transactions were completed on mobile devices, an increase of over 35 percent compared with July 2011.
  • Outlook: Revenue for Q3 is expected to be between $580 million and $620 million, representing a 35 percent to 44 percent growth rate. Income from operations for the third quarter 2012 is expected to be between $15 million and $35 million, compared with a loss from operations of $0.2 million in the third quarter 2011.

1:57 pm: Still waiting for the call to kick off. I suspect that the company will address how it has started to break out direct revenue for the first time now that it has become material.

The largest contribution to direct revenue is Groupon Goods, which sells random products, such as an LED battery-powered corkscrew or towels and blankets. Other areas that fall into the category include movie tickets or travel vouchers, but only when Groupon agrees to buy a bunch up front in order to get a better deal.

Direct revenue totaled $65.4 million in the quarter, compared with $19.2 million in the first quarter of 2012.

2:03 pm: Groupon shares continue to dip in after-hours trading below the company’s 52-week low, down 16.3 percent to $6.32 a share. Previously, its all-time low was $6.35 a share.

The call has started!

As expected, CEO Andrew Mason and CFO Jason Child will be talking.

Mason kicks it off by saying it was a solid quarter — total revenues grew 53 percent when not taking into consideration foreign exchange.

Mason is going through more highlights, which were also in the release, but he notes that the economic woes in Europe were a drag on earnings. Additionally, he adds that they generated $49 million of free cash flow, strengthening balance sheet. They now have $1.2 billion in cash.

First, he addresses Europe: “We grew our presence in Europe rapidly to quickly gain marketshare. While the benefits of doing that are clear, given our share, we have to tune our deal mix and apply learnings from other more developed markets.”

He states the obvious that high-end deals in Europe don’t do so great when people are worried about just paying the bills.

So, they’ll be working on things, and trying hard to provide more value, which means trying to pass along more savings to consumers. In general, he says consumer satisfaction is 25 basis points lower in Europe than it is in the U.S.

2:10 pm: By the end of Q3, they hope to have better personalization tools live in some European markets, as well as some technology improvements on the back-end to help merchants manage the process. He mentions that Kal Raman, who was recently appointed to head up global operations, will be in charge of these changes. If you don’t recall, Raman, who was’s former CEO, was hired to provide adult supervision.

Mason has a quick story! He says Groupon’s managers were surprised that an average consumer on the street in the U.S. has heard of Groupon. I guess they’ll be working on getting to that same level of brand-name recognition abroad.

2:12 pm: Mason is now updating the status of Groupon’s merchant tools, which includes Scheduler, Rewards and Now. About 20 percent of its merchants are using one or more of its tools. When it comes to Now, 6,000 merchants, and 1.5 million customers are enrolled. These products are part of the company’s initiative to build an operating system for small businesses.

2:16 pm: Sheesh, this call is going fast.

Now Jason Child is taking over the microphone to discuss foreign exchange impact. (Groupon is not alone in feeling this. EBay and Amazon also saw a pretty big impact from Europe’s economic issues).

Child is reading his script much slower, and is going down the list of things he wants to highlight from Europe to the increase in sales from Groupon Goods.

In the second quarter, he said direct revenues primarily had to do with Groupon Goods. He says not all of the Goods business is sold on a direct basis. “Our revenue recognition is the same as other e-commerce companies,” he notes.

Now turning to the third-quarter outlook: “It is not possible to accurately predict demands,” he said. While that’s a typical boilerplate statement used by most companies, it seems to be an understatement in this situation for this company that is less than four years old.

Shares are now down 20 percent, by the way.

Mason is back on the line to wrap things up: He says they are on track this year to hit $5 billion in gross billings and $2 billion in revenue, and “our cash balance has increased every quarter. … With nearly a third of North American transactions coming from mobile, we are quickly becoming one of the largest mobile commerce companies.”

Mason adds that Groupon has accomplished all that before its fourth birthday. Finally, he thanks the employees and stockholders for joining the company on its journey — albeit a pretty rough ride (my words, not his).

Now on to Q&A.

2:30 pm: Mason addresses a question about a slow in revenue growth. “Our active customers are growing over 60 percent year over year, while at the same time we’ve reduced our marketing spend by 50 percent in the same period,” he said. “At the same time, we are making investments in driving the number of active users.”

Mason takes a question on sales team declines: “We’ve spoken in the past on the investments we are making on improving internal operations, and we are starting to see those bear fruit. It allows us to increase productivity of our sales force without making investments in headcount.”

Now he’s talking about what deals get listed on emails. “So when we launch Goods, we might make a disproportionate investment to get it on the radar and do cross-promotion. It does not reflect the lack of opportunity in local commerce. We have the strongest competitive position in local and we are continuing to make the majority of investments in improving our e-commerce experience.”

Analysts are pushing for a stock buy-back (after all, prices are down — way down). After a no comment from Child, Mason says: “We are always looking to optimize our capital structure and have nothing to announce at this time.”

2:37 pm: More on how Mason says they are increasing internal efficiencies: We’ve increased revenue year over year, while reducing marketing spend by 50 percent. This is a company that historically optimized for hyper growth. We haven’t been shy about using people to solve problems as we hang on to the rocket ship. But now we are able to invest in low-hanging fruit on operations and marketing spend. We are still in the early stages of rolling out nuts and bolts of basic technologies, but as we roll more and more of those out, we expect to see a reduction in the cost of acquiring new customers.” Over the past year, Mason says they’ve gone from managing 600 active deals to 8,000 at one time.

2:42 pm: More on its European problems: Mason says one of the root causes in Europe is macro, and that higher-priced deals above $100 have plummeted in popularity. It’s also investing in mobile, which has low penetration rates internationally. Mason adds that mobile users tend to spend 50 percent more than a desktop user in the U.S.

Back to Child to talk about Groupon Goods, and when it decides to pick up a product. He says they try to optimize for dollars and margins, and they only pick up a product, and sell it, if it makes sense. It sounds like Costco, where many of the products sold are picked based on price, rather than availability — which means inventory is always different.

Mason on Groupon Goods: “The success we’ve had on Groupon Goods is a reflection of our consumer brand. Our customers think of us as a way to find unbeatable prices, from local deals to products that let you make artisan yogurt, which is on the site today.”

“It reminds me of our local business in the early days,” Mason says, adding that there’s still a lot to do. “We don’t have a lot of basics, and we don’t have a very shoppable market place …”

He says stay tuned on that for how things will change.

Mason ends the call with his thoughts on mobile: “We have the largest percentage of mobile transactions happening today that we know about compared to any other e-commerce company. We feel great about our business, and that foundation, which we can use to further introduce local e-commerce into the ecosystem — not just in the U.S. but throughout the world.”

In summary, analysts asked very few hardball questions despite the markets shocking reaction to today’s results. Over the past six months, the company has taken a lot of steps toward using technology to manage and monitor its sales, rather than throwing people at the problem. Next up will be to implement those efficiencies globally, especially as Europe’s economic woes negatively affects sales there.

That’s it, thanks for reading.

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— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik