Groupon (GRPN) reported Q4 earnings after the bell yesterday and the market dumped the stock after hours. The stock closed the after-hours session 25% lower than the regular session, largely because of a weaker-than-expected Q1 forecast for revenues. I'm going to review the quarterly report and assess whether or not the stock is a buy.
Gross billings increased from $1.23 billion to $1.52 billion. Revenue increased from $492 million to $638 million. International revenue actually dropped from $312 million to $263 million, while North American revenue more than doubled from $179 million to $375 million. Segment operating income decreased from $17.9 million to $13.7 million.
Net operating loss was reduced from $14.9 million to $12.8 million. Excluding stock-based compensation and acquisition-related expenses, operating profit came in at $14 million in Q4. On the surface, these numbers are pretty much in line with what analysts had expected: $638 million and adjusted EPS of $0.02 (EPS was -$0.12 but included one time expenses, which, if excluded, would bring EPS in line with estimates).
So why are investors hating the stock? Easy -- guidance was weak. With expected revenue between $560 million and $610 million in Q1, revenues are well short of expectations of $650 million. This is in part blamed by the fact that Groupon Goods is more of a seasonal business and, as such, Q4 is expected to be the best quarter of the year.
The other disappointment was the drop in local deals revenue from $479 million to $413 million. It appears that this was most likely due to the company's decision to reduce its take on local deals to help "drive growth by attracting more top merchants to Groupon. While we believe marketing will always be an effective growth lever for us, our results show that it is not the only way to accelerate top line. By lowering deal margins, we created more value for our merchants, which enabled us to improve our merchant and deal quality. These actions not only drove demand and improved the customer experience, but also helped us make some of our largest ever sequential gains in the North America segment market share in Q4," as per CEO Andrew Mason.
Additionally, international revenues were a disappointment. The company's COO Kal Raman signaled that there would be big layoffs in the international division to help get that division operating as efficiently as the North American division. This could potentially be a big driver of profitability growth as the company automates and rightsizes this division.
In looking at the growth of Groupon Goods and other initiatives including Groupon Payments and Groupon Breadcrumb, which offers inventory management among other things, it's pretty clear that Groupon is moving more and more away from its initial growth driver of local deals into a platform much like the Amazon (AMZN) marketplace, tailored specifically for local businesses to do business with their customers. Now less than 50% of the transactions come from emails to its mailing list, which is 12% lower than Q3 2012. It seems as if the company is making the transition into a shopping marketplace, leveraging the power of its 40+ million email subscribers. This is what some people envisioned a couple of years ago as the local deals business was being called into question, and judging from the rapid growth in Groupon Goods, it seems like it is doing a good job of this.
So the question now becomes whether or not the company can fully transition into what it views itself as: the operating system for local business. Again, as per Andrew Mason:
Most of these changes are good for Groupon, as evidenced by our re-accelerating growth and strengthening market leadership position, but they drive short term volatility in the business. So while we are in somewhat uncharted waters, with multiple large-scale and fast-growing businesses, I want to be clear that our vision to be the operating system for local commerce remains at our core.
There is no one better positioned than Groupon to meet the needs of consumers and merchants in today's $3 trillion local marketplace. That we're also rapidly becoming a leader in curated e-commerce in parallel is a clear vote of confidence from our 41 million active customers and a hint of the size of the opportunity that lies ahead.
The Breadcrumb iPad-based point of sale (POS) service for retail establishments has me intrigued. As an inventory management tool, it allows for easy uploading of menu items and inventory count to local businesses' iPad terminals, which should help businesses manage inventory better. It is being grouped together with Groupon Payments, which is an online payment service that offers very low fees to merchants accepting credit cards -- 1.8% for MasterCard (MA), Visa (V), and Discover (DFS), and 3% for American Express (AXP). Ultimately the goal of the company is to create a platform where it is tied in with local businesses' operations, allowing them to lower transaction fees, manage inventory, and get rid of excess inventory faster than they otherwise would by tapping into Groupon's massive customer database.
On Tuesday, e-commerce whisperer Mark Mahaney gave a presentation that focused on mobile and local trends. According to this article:
Most of what Mahaney, managing director of RBC Capital, spoke about applied to big retailers, but some of his forecast was applicable to startups too. One of the key takeaways: Cash troves at companies including Amazon, Google, Yahoo and eBay mean they will likely be looking for acquisitions this year, so startups that position themselves in the local commerce sector, for example, are in a good spot. Mobile gaming companies like Zynga and daily deal giant Groupon were 'flameouts' over the past year, but Mahaney said he wouldn't count out either considering that companies including eBay and Amazon were at one time considered no-gos as well.
I have to say that despite his many apparent faults, I have to give Mason the benefit of the doubt. He has managed to grow a business from $15 million in revenues in 2009 to a $2.5 billion run rate as of Q4 2012. And he has grown Groupon Goods from nothing to a near $1 billion run rate in two years. That is absolutely astonishing growth. While there are some definite flaws with this latest report, I can see a scenario in which Groupon can perfect its local business platform, pare down costs, and generate a good deal of free cash flow. At a 25% discount to yesterday's stock price and with about 40% of its market cap in cash, I think there are worse things to do than buy the latest deal on Groupon's stock.