For once, Groupon (NASDAQ:GRPN) delivered a good set of quarterly earnings with both revenues and EPS surprising on the upside, and operating income coming in close to consensus expectation.
Despite the rising contribution of e-commerce revenues (which are less profitable), the US business was healthy as we expected (see our previous article) with a margin up 130bps year-on-year to 5.8% and EMEA in turnaround mode with 6% revenue growth in the quarter and a margin up 970bps to 14.7%.
Unfortunately, these key positives were overshadowed by a poor Q1 EBITDA guidance ($20-40m vs. consensus at $96m) as the integration of Ticket Monster and ideeli is expected to have a $20m negative impact and as Groupon decided to step up its marketing and growth investments ($25m impact).
The model is in transition, but is starting to deliver
We expected growth initiatives, such as the expansion in flash sales, to have no major negative impact on earnings as Groupon's management seemed committed to improving group profitability. Obviously we were wrong. And this disappointing guidance acts as a reminder that the business model is still in transition and that earnings releases are likely to remain tricky for a while.
Anyway, we reiterate our view that Groupon's new business model is starting to deliver, as illustrated by the group's sound Q4 performance which compares well against disappointing earnings at e-commerce peers Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). Notably, the reacceleration in revenue growth (+20% in Q4 vs. +5% in Q3) was a key positive.
The decision to exit China was also great news and demonstrated management's discipline against a backdrop of still poor performances from its RoW business in Q4. Increasing financial discipline is likely to help going forward.
On the margin side, we would not see too negatively the $25m extra costs announced to boost growth. Notably the marketing investments in order to increase the mobile & pull platforms awareness are easily understandable. Groupon seeks to reduce as soon as possible its reliance on e-mails and to take customers to its mobile app and site.
The transition to mobile & pull is key in the building of a smoother, more efficient model. The $25m investment, likely to be a one-off, will accelerate the transition and therefore give a boost to revenue growth and earnings from 2015 onwards.
In all, limited earnings growth in 2014 should not be seen as an issue as it will be followed by a strong earnings leverage in our view driven by: 1) solid revenue growth 2) decline in marketing costs from the 2014 peak and 3) rising profitability of international operations.
Against this backdrop, we do not view the stock's 2015 P/E of 25x as excessive and reiterate our Buy.
Disclosure: I am long GRPN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.