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I remain bullish on Groupon (NASDAQ:GRPN), despite its 4Q'12 earnings miss. GRPN has a great business model and its active customer base is expanding. Also, the company has significant growth opportunities, with a potential addressable advertisement market of $500 billion. Moreover, analysts are anticipating a high next five years growth rate of 25% per annum.

Financial Highlights

GRPN reported its 4Q'12 financial results yesterday, 27th February. The results for the quarter came below the analysts' consensus. The company reported the recent fourth quarter revenues of $638 million, up 30% on a year-over-year basis, missing the analysts' consensus of $650 million. In the recent fourth quarter 41% of the total revenues were earned by the international markets segment and remaining 59% was contributed by the North American segment. International market revenues for the quarter were down 16% on a year-over-year, whereas North American revenues were up 110% year over year. The following chart shows revenues of GRPN for the last six quarters.

Source: Company Reports.

Gross billing for the recent quarter increased 24% on a year-over-year basis to $1.5 billion, whereas gross profit of $356 million for the fourth quarter was down approximately 10% on a year-over-year basis. GRPN has been struggling to maintain its gross margin in the recent quarters. I believe the decline in the gross margin is a result of the company's decision to prioritize growth. The following chart shows gross margin of GRPN for the last five quarters.

Source: Company Reports and Calculations

GRPN also failed to register healthy consolidated segment operating income (CSOI), which was down to $13.7 million in 4Q'12 as compared to $18 million in 4Q'11. Furthermore, GRPN posted a loss of $0.01 per share in 4Q'12, missing the analysts' EPS consensus of $0.01.

GRPN's take rate for 4Q'12 was 42%, up 2% on a year-over-year basis. However, take rate for the quarter was down 4% on a quarter on quarter basis. The following chart displays GRPN's take rate for the last six quarters.

Source: Company Reports

Marketing expenditures and active customer growth for the quarter were positive takeaways from the recent earnings release. Marketing expenses for the quarter were down from 32% of total revenue in 4Q'11 to 10% of the total revenue in 4Q'12. Moreover, the company was able to expand its active customers base to 41 million in 4Q'12, an increase of 1.5 million quarter on quarter.


(Click to enlarge)

Source: Presentation Slides

Outlook

GRPN provided a 1Q'13 revenue guidance range of $560 - $610 million, representing an expected increase of 0% to 9% on a year-over-year basis. Operating (loss) income guidance range for 1Q'13 was ($10) to $10 million. Also, GRPN is expecting stock based compensation of $30 million for the first quarter of 2013.

Moreover, analysts are anticipating a high earnings growth rate of almost 25% per annum for the next five years. Following are the analysts' EPS forecast for GRPN.

2013

2014

2015

2016

EPS estimates

$0.05

$0.09

$0.25

$0.37

Source: Nasdaq.com

Conclusion

I remain bullish on GRPN despite disappointing results for the last quarter. GRPN has a large potential market to address, which will help the company to expand its top and bottom lines. Also, it needs to expand deals offered by the company and improve upon its "deal relevance" -- targeting the right customers according to their demands and needs characteristics.

Source: I Still Believe Groupon Will Fly High