09 February 2012 at 10:09 GMT
Impressive sales growth, tax expenses spoil profit
Groupon reported its first quarterly earnings report since its IPO last year. Fourth quarter sales came out at USD 506 mn. beating estimates ofUSD 473 mn. EPS came it at minus 2 cents missing profit estimates of 3 cents due primarily to an extra tax expense provision related to the set up of an international headquarters in Switzerland. Excluding this, we assume, nonrecurring tax expense EPS would have been positive with 5 cents beating estimates.
The key measure for investors in Groupon is the second derivative in growth rates (how fast are these growth numbers declining QoQ?). Here Groupon delivered but they need to continue their impressive growth in order not to disappoint investors. Analysts' EPS estimates are 1.36 in 2015 up from expected 0.31 in 2012 and actual -0.72 in 2011. Only at these growth rates is the company valued at forward P/Es of 80.6 and 18.1 in 2012 and 2015 respectively. The key to this growth will be the transition from a labour intensive business model to a more scalable model built on technology. We still have doubts about this transition but so far efficiency is increasing even in their current labour-intensive business model; Groupon has more than 10,000 employees, compared to Facebook's 3,200 and Facebook did a little more than double the revenue of Groupon in 2011.
Here are my overall conclusions after reading the quarterly report.
The good things:
- Sales growth rates on QoQ and YoY are not deaccelerating as fast as one might have feared.
- 1Q sales guidance from Groupon is USD 510-550 mn. compared to USD 501 mn. expected by analysts
- Active customers were 33 mn. at year's end up 20 percent QoQ
- 1Q operating income guidance is USD 15-35 mn. up from USD 15 mn. in 4Q
- The revenue/gross billings ratio (Groupon's cut on daily deals) is holding up at 40.6 percent in 4Q and 2011 only slightly down from 42.0 percent in 2010.
- 4Q Marketing expenses are down 22 percent YoY in line with previous indications from Groupon
- Free cash flow was USD 143 mn. in 2011
- Groupon expects to ramp up their technology headcount
The bad things:
- USD 34.8 mn. in extra tax expenses related to the setup of an international headquarters in Switzerland. Groupon is very vague in their explanation regarding the tax expenses.
- The shares were down 16.5 percent in extended trading after the market close
- Groupon Now! , a mobile app that will connect customers with real-time coupons for nearby retailers, is only mentioned once and rumours have it that it is still not working properly. Groupon Now! is key going forward to bring down the labour costs/revenue ratio and boost profit margin.
- Not updating its previous benchmark provided in the S-1 filing (IPO prospect, red.). This is always a red flag.
- Aggressive investing in technology headcount could mean short-term pain to profit growth