You only get one chance to make a first impression, and Groupon's (Nasdaq: GRPN) first earnings release since going public wasn't particularly a good one, judging by investors' reaction to the figures. Shares have sold off precipitously after the digits were released. Were they that bad?
The juicy deets
Revenue nearly tripled to $506.5 million in the fourth quarter, while gross billings, which is the total collected from customers and includes the merchant's cut, more than tripled to $1.25 billion. By the time you get to the bottom line, all that black ink turned into a light shade of red, which is better than the deeper hue seen a year ago.
Groupon's net loss was $37 million, a hefty improvement from the $313.2 million lost during the prior year's fourth quarter. On a non-GAAP basis, it came out to a loss of $0.02 per share, which is disappointing shareholders as they were expecting a profit of $0.03 per share.
During the full year, sales exploded by 419% to $1.6 billion, and gross billings jumped 437% to $4 billion. The company generated a net loss of $275 million in 2011.
I wish my gym defined me as this "active"
At the end of the year, Groupon's global active customer base increased by 275% to 33 million. That sounds all fine and dandy until you consider how the company defines "active." Any customer that has purchased a Groupon in the past twelve months is considered an "active customer," and can include individuals with multiple registrations.
This isn't quite a red flag, but it strikes me as a bit opaque, since twelve months is a pretty long time and anyone with multiple e-mail addresses (i.e., anyone) may be double counted. Personally, I've bought a Groupon in the past year, but I opted out of the emails and effectively blocked the company out of my consciousness about six months ago with little intention of going back. Yet, by this definition, Groupon still has me in their database under the "active" column.
This is particularly concerning since Groupon buyers aren't the most loyal bunch. They're just in it for the deal, regardless of who's providing it, be it Groupon, Amazon.com (Nasdaq: AMZN) investee LivingSocial, Google's (Nasdaq: GOOG) new Google Offers, or any number of smaller local competitors. That twelve-month timeframe is far too long for a notoriously fickle crowd that has little to no brand loyalty.
Groupon: International daily dealer of mystery
The daily dealer put up some solid growth figures on its home continent, but its international growth absolutely soared. Revenue from abroad rose 279%, to $318 million, compared to the "modest" growth of 113% domestically, to $188.5 million. That means that the majority of Groupon's sales came from overseas, while last year it was split almost evenly.
CEO Andrew Mason said Groupon finished the year "having helped 250,000 local merchants across 47 countries grow their businesses while saving Groupon customers billions of dollars." CFO Jason Child also added that the quarter saw an unusually large tax bill related to international earnings along with a new international headquarters that Groupon just set up in Switzerland.
Marketing matters
Remember that silly "adjusted consolidated segment operating income" metric that Groupon had to drop in the face of criticism (including from the SEC), since it's a tough sell to say that marketing costs don't matter when you're a marketing company? Let's check back on those marketing figures now.
Marketing expenses fell by 22%, to $156.5 million. Mason adds that subscriber acquisition costs have declined and Groupon is now geared more towards transactional marketing. He said, "We've gotten a lot smarter in how we do marketing. The percentage of organically acquired customers continues to improve."
This $44.4 million reduction in marketing expenses is helping bring Groupon closer to profitability, but at what cost? As an online marketer, it relies on marketing to drive growth. Slashing marketing runs the very real risk of slashing growth, all for the sake of trying to squeeze out a couple of pennies per share of non-GAAP earnings.
Better than low expectations
Did Groupon's figures beat my personal lowball expectations? Absolutely. Is there hope of reaching profitability soon? Signs point to "yes." Should you buy Groupon? Only if it's $10 for $20 worth of authentic Cuban cuisine at your local eatery (Limit 2 per person, not valid for purchase of alcohol).
But should you buy Groupon shares? Not even with someone else's money. Regardless of if the company can scrounge up some earnings, that won't address the underlying fact that Groupon has no sustainable competitive advantage, and that the daily deals industry is not profitable, independent of how popular it may be. Amazon's recent 10-K disclosed that that LivingSocial lost $558 million last year on $245 million sales, a 228% negative net margin.
Don't buy Groupon, unless they email you about a 75%-off deal on the stock.
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