Groupon (NASDAQ:GRPN) surprised the market with better than expected revenue and EBITDA while customer acquisition remains steady as the company added over a million new customers during the quarter in North America, bringing the total number to 27.9m as of June 30th. As the company continue to dispose unprofitable operating segments and become a more focused company, I believe that higher quality deals will draw customers into the platform and this could lead to a sustained revenue and EBITDA growth. The better than expected EBITDA growth suggests that seems to be the case and certainly shows that the CEO Rich Williams has made a lasting mark in GRPN since his arrival last year. The communication with investors has also improved and this has been allowing investors to become more comfortable with the name.
Going forward, I see several drivers that will be accretive to GRPN's growth outlook in the coming months. First, the company still has around $75m-$125m in incremental marketing spend for the second half to maintain the momentum in the North American local business market. There is also ongoing enhancement on product quality, which I previously said will be critical to drive recurring users on the platform, particularly on the product side. I remain bullish on GRPN post results and continue to believe the company to be a key beneficiary of the O2O trend in North America. Looking at case studies in Asia such as Dianping-Meituan or Nuomi (NASDAQ:BIDU), we can see that the group-buy business is an essential component of any large internet company's ecosystem. As Google (NASDAQ:GOOG), Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN) gradually move into local advertising and services, I believe that GRPN will be an attractive asset destined for takeout.
Revenue of $756m beat consensus $711m with EPS loss per share of $0.01 compared with consensus $0.02 loss per share. The company guided year revenue $3.0b-$3.1b compared with prior estimate of $2.75b - $3.05b and consensus $3.02b, suggesting that GRPN's prior challenges may be seeing a rebound as the platform continues to gain traction among the customers. Although investors will see a $25m hit from the Brexit, long-term margin profile should be sustainable as GRPN shuts down unprofitable businesses as such the Indonesian unit in Q3 and I believe that GRPN's initiative of becoming a more focused company will be a long-term positive.
GRPN is certainly keen on simplifying its business to be competitive in the local ad/services segment with further reduction on the empty calorie (ie. negative margin categories in the goods segment) and increased focus on higher value-add deals that are more suitable to the mainstream. Evidence of improvement is apparent with shopping margins increase for the third quarter up to 13.4%, a 240bps y/y gain. As for the mobile app, the company acknowledges that its app is lagging behind that of its peers from overseas market and this is important given that it shows GRPN will be aggressive on closing this gap in when it comes to deal quality, platform scale and convenience in payments and/or booking.
GRPN is not out of the woods yet and still has a lot to work on but Q2 suggests that it is moving towards the right direction. Remain bullish on the stock.
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