Making Sense of Groupon’s Messy Second Quarter

Groupon (NASDAQ: GRPN) recently posted ugly second-quarter numbers that missed analyst estimates on the top and bottom lines. The e-commerce marketplace's revenue fell 7% annually to $617.4 million, missing estimates by $15 million. Meanwhile, total operating expenses rose 16% to $387.9 million.

Groupon's non-GAAP net income fell 10% to $10.7 million, or $0.02 per share, which missed expectations by a penny. On a GAAP basis, its net loss from continuing operations widened from $6.8 million to $92.3 million, or $0.17 per share.

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Image source: Getty Images.

Big litigation charges and messy guidance

A large portion of the loss was attributed to a patent infringement lawsuit filed by IBM (NYSE: IBM) , which resulted in an $82.5 million ruling against Groupon in late July. Groupon plans to appeal the ruling, but it already booked a one-time litigation charge of $75 million.

Groupon's adjusted EBITDA inched up 6% to $56.2 million. Groupon didn't provide any guidance for its revenue or net income growth for the full year, but it expects its adjusted EBITDA -- which is arguably a less reliable metric -- to rise 12% to 16%, compared to 39% growth last year.

Groupon didn't factor the IBM charges into that guidance. Instead, it provided a free cash flow (FCF) forecast -- excluding all potential litigation charges from IBM -- of $200 million for the full year. That would represent a 155% increase from its FCF of $78.3 million in 2017, but the growth rate will be much lower if Groupon pays the full settlement to IBM.

How fast is Groupon's core business growing?

Groupon's global units sold fell 10% annually to 40 million, mostly due to a 14% decline in North America. Groupon states that the drop was expected due to its prioritization of more profitable unit sales over less profitable ones. However, those declines are also accelerating from previous quarters -- which will likely throttle Groupon's sales growth.

Period Q3 2017 Q4 2017 Q1 2018 Q2 2018
Units sold (1%) (6%) (7%) (10%)

Data source: Groupon. Percentages = year-over-year changes.

Groupon's gross profit in North America fell 6% annually to $219.4 million. Also in that geography, gross profit at its Local unit fell 8% to $165.3 million, partly due to the expansion of its Groupon+ cash back program and the sale of certain parts of its food delivery service OrderUp to GrubHub last year. Gross profit at its Goods segment rose 4% to $37.8 million thanks to its focus on higher-margin units, but gross profit at its Travel unit fell 8% to $16.3 million. The total number of active customers in North America rose less than 1% annually to 32.2 million, while Groupon's gross profit per active customer in the region over the past 12 months stayed flat.

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Image source: Getty Images.

On the bright side, Groupon's international gross profit rose 11% annually (4% on a constant-currency basis) to $104.3 million, as its 8% profit growth in Local and 28% profit growth in Goods offset an 11% decline in Travel. The international unit's total number of active customers grew 4% to 17.1 million, and its trailing-12-month gross profit per customer rose 10%.

Groupon attributed the growth of its international business to "product, supply, and marketing initiatives," along with the prioritization of profit growth and customer experience improvements over unit sales. The company left many tougher markets across Latin America and Asia over the past two years, and it's mainly focusing on expanding in healthier markets like Europe.

Buoyed by buyout hopes

Groupon has a decent international business, but it simply isn't strong enough to offset ongoing declines in North America yet. Meanwhile, the IBM ruling is casting a long shadow over the company's growth.

The only thing that seems to be propping up Groupon shares, which have lost nearly half their value over the past five years, is the notion that the company will be acquired . After all, the company has a market cap of just $2.7 billion and trades at just over one times this year's sales.

However, many bigger tech companies -- including Amazon , Facebook , and Alphabet 's Google -- once competed against Groupon in the local deals and discounts space, and all those companies abandoned the market due to growth and profitability concerns. Therefore it's doubtful that Groupon remains at the top of any major tech or e-commerce company's shopping list.

Groupon's stock might rally over the short term on buyout buzz or hopes about its international business. But over the long term, I think the company is still in trouble -- and it will take more than layoffs and divestments to fix its core business.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, Facebook, and Grubhub. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Facebook. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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