A few months back, I published a scathing criticism of Groupon (GRPN). Among the factors I cited in suggesting that investors steer clear of the shares were the high cost Groupon pays to recruit new subscribers, the low percentage (25%) of Groupon's subscribers who actually purchase a coupon, and the fact that the company's merchant-payment schedule was not competitive with comparable offerings from competitors Google (GOOG) Offers and LivingSocial, an issue which was already causing some participating merchants to defect. On Wednesday, Groupon reported a small loss for the fourth quarter causing its shares to fall 14% the following day--the stock now trades around $20, a decline of nearly 30% from its IPO price.
What was surprising about the report, and by extension, about the sell off in Groupon's shares, is that overall, the results were positive. Revenue came in at $506.475 million, far ahead of analysts' expectations of $473 million, and up 194% from the same period in 2010. The revenue figure was up 18% from the third quarter, indicating that sequential revenue growth is accelerating--revenue grew only 10% from the second to the third quarter. The quarterly loss was apparently attributable to tax expenses related to the company's international operations, excepting that, "the company's operating profit was $15 million for the quarter," according to the Wall Street Journal.
Notably, the company's marketing expenses as a percentage of revenue fell to 30% during the fourth quarter, down 25% from the first nine months of the year, and down 70% from the fourth quarter of 2010. This allays investor concerns over the astronomical cost the company was paying to acquire new subscribers and recruit new merchants. While this is a step in the right direction, The Wall Street Journal notes that the company still has a ways to go before its marketing expenses fall to a more sustainable percentage of revenue such as the 5% of sales Amazon pays for marketing.
When you look at the numbers then, you discover that Groupon is quickly becoming more efficient from a marketing perspective. The company spend $14 million less on marketing during the fourth quarter than it spent in the third quarter, yet generated $76 million more in revenue. In fact, marketing fell as a percentage of revenue in every quarter of 2011 according to the company.
Perhaps the most notable part of Groupon's fourth quarter report however, is the fact that for the first time, Groupon's cash and cash equivalents exceed its accounts payable and merchants payable. This is absolutely critical as it may signal that the business is no longer operating in a fashion that closely resembles a ponzi scheme. In my previous article on Groupon, I noted that if all of Groupon's participating merchants suddenly came-calling wanting their portion of the coupons sold, Groupon could not cover the balance. In other words, Groupon was literally spending money that didn't belong to the company. Now it appears, Groupon could not only pay its merchants the money they are owed, but could do so twice-over. As of December 31, 2011, cash and cash equivalents totaled $1.12 billion while accounts payable and merchants payable totaled only $557.2 million. This is a small miracle considering the company owed more than twice as much in the form of accounts payable than it had in cash and cash equivalents just three months prior. If you have short positions in Groupon, I suggest taking profits after this week's slide. Same thing goes for put options on the stock. Incredibly, it appears Groupon may be righting the ship.