Business Overview and History

Groupon, Inc. (GRPN) has been a prominent player in the e-commerce space since its inception in 2008. Founded in Chicago, the company has evolved from a daily deals platform to a global scaled two-sided marketplace, connecting consumers with local merchants. As Groupon navigates the ever-changing e-commerce landscape, the company has faced both challenges and opportunities in recent years.

Groupon was launched in 2008 with the goal of providing consumers with a platform to discover and purchase discounted local services and experiences. The company's initial business model revolved around daily deals, where Groupon would negotiate discounts with local merchants and offer these deals to its growing user base. This unique approach to e-commerce quickly gained traction, and Groupon experienced rapid growth in its early years, expanding into international markets and diversifying its product offerings.

In its early years, Groupon sought to leverage its position in local commerce, e-commerce, and deals to establish itself as a key entry point for consumers on the internet. The company grew rapidly, taking advantage of the fragmented ecosystem of players vying to serve as the "front door" to the internet for consumers. However, as the online ecosystem matured and consolidated, with a few large platforms emerging as the dominant "front doors" to the internet for a vast majority of consumers, Groupon had to adapt its customer acquisition strategy, shifting its marketing efforts towards acquiring customers through these large platforms.

As the daily deals market became increasingly saturated, Groupon faced significant headwinds. The company pivoted its strategy, shifting towards a broader marketplace model that allowed merchants to list their offerings directly on the Groupon platform. This transition, coupled with investments in technology and infrastructure, has been a key focus for Groupon in recent years.

In 2022, Groupon initiated a multi-phase cost savings plan designed to reduce its expense structure and align with its go-forward business and financial objectives. This included a restructuring plan that was expected to result in an overall reduction of approximately 1,150 positions globally. Groupon has incurred total pre-tax charges of $21.3 million since the inception of the 2022 Restructuring Plan.

The company has also faced challenges related to technical debt and the need to modernize its technology platform. In 2024, Groupon reached a milestone of 100% mobile web and desktop traffic in North America on its new website, which is expected to enable faster new feature development. However, the platform changes resulted in a temporary drop in the retention rates of Groupon's legacy customers, presenting a headwind to the company's financial performance.

Groupon operates in two main business segments: North America and International. The North America segment includes revenue generated from the company's Local, Goods, and Travel categories. Local revenue represents the largest portion of North America revenue, accounting for $81.48 million and $259.65 million in the three and nine months ended September 30, 2024, respectively. The Goods category generated $2.49 million and $8.36 million in the three and nine months ended September 30, 2024. Travel revenue was $2.92 million and $11.37 million for the respective periods.

The International segment also operates across the Local, Goods, and Travel categories. International Local revenue was $23.47 million and $70.62 million for the three and nine months ended September 30, 2024. Goods revenue from the International segment was $2.73 million and $7.45 million, while Travel revenue was $1.38 million and $4.73 million for the respective periods.

Financial Performance and Metrics

Groupon's financial performance has been mixed in recent years. In the third quarter of 2024, the company reported revenue of $114.48 million, a 9.5% decrease compared to the same period in the prior year. This decline was primarily attributed to a drop in North America revenue, driven by an increase in local voucher redemption rates and the exit of the local business in Italy within the International segment.

Despite the revenue decline, Groupon's gross profit margin remained strong at 90% in the third quarter of 2024, consistent with the prior quarter. The company's marketing expense as a percentage of gross profit was 35.2%, within the expected range of 30-35%. Adjusted EBITDA for the quarter was $15 million, marking the sixth consecutive quarter of positive adjusted EBITDA for Groupon.

Groupon's active customer base stood at 15.46 million as of the trailing twelve months ended September 30, 2024, down from 17.01 million in the same period of the prior year. The decline in active customers was primarily driven by the exit of the local business in Italy and a drop in retention rates for legacy customer cohorts in North America due to platform changes.

The company's net income for the third quarter of 2024 was $13,928,000, a significant decrease from $40,810,000 in the same period of the previous year. Operating cash flow (OCF) was negative $16,258,000, down from positive $13,860,000 in the prior year's quarter. Free cash flow (FCF) also decreased, reaching negative $19,700,000 compared to positive $17,980,000 in the same quarter of the previous year.

Groupon's performance across geographic markets shows that North America accounted for 75.9% of consolidated revenue in the most recent quarter, while International accounted for 24.1%. No country outside the United States represented more than 10% of consolidated revenue.

Navigating Challenges and Opportunities

Groupon has faced several challenges in recent years, including the evolving e-commerce landscape, changing consumer preferences, and the impact of the COVID-19 pandemic. The company's pivot towards a broader marketplace model has been a key focus, as it aims to provide a more sustainable and diversified revenue stream.

One of Groupon's notable achievements has been the progress made in its International segment, excluding the exit of the local business in Italy. The company has successfully implemented its marketplace playbook in several international markets, such as Spain, which has seen strong double-digit growth. This success demonstrates Groupon's ability to apply its learnings from the North American market to drive improvements in international operations.

In North America, Groupon has faced headwinds, including the impact of platform changes and a decline in retention rates for legacy customer cohorts. However, the company has seen growth in new customer cohorts, which it believes is a positive signal for future growth. Groupon is also focusing on enhancing its product offerings, such as improved personalization, search relevance, and the introduction of features like video content and gifting experiences.

Financials and Liquidity

To bolster its financial flexibility, Groupon recently announced the raise of $197 million in new secured convertible debt, maturing in 2027 with a 6.25% coupon and a $30 strike price. This financing is expected to provide the company with additional resources to navigate its ongoing transformation.

Groupon's liquidity position as of the most recent quarter shows a debt-to-equity ratio of 5.82, with cash and cash equivalents of $159,710,000. The company terminated its $42,780,000 revolving credit facility in February 2024 but retains access to letters of credit under a separate cash collateral agreement. The current ratio and quick ratio both stand at 0.93, indicating potential short-term liquidity challenges.

Outlook and Conclusion

Looking ahead, Groupon's management has provided an updated outlook for the full year 2024. The company now expects year-over-year revenue change to be in the range of -6% to -4%, down from its previous outlook. Adjusted EBITDA is expected to be between $65 million and $70 million, with the company targeting positive free cash flow for the full year.

For the fourth quarter of 2024, Groupon is guiding for revenue between $124 million and $131 million, representing a decline of 10% to 5% year-over-year. The company expects positive adjusted EBITDA between $14 million and $19 million in Q4 2024.

Looking further ahead to 2025, Groupon currently anticipates revenues to be flat to low single-digit growth compared to 2024, with the first half of the year expected to show a decline and the second half showing growth. EBITDA is projected to be similar or better than 2024, and free cash flow is expected to remain positive.

It's worth noting that Groupon's performance has been volatile, with the company ending at the low end of their revenue guidance in Q3 2024 but beating the high end on EBITDA. The company also experienced a significant drop in performance in its North America local business, going from 7% year-over-year growth in Q2 2024 to an 8% year-over-year decline in Q3 2024.

While Groupon has faced challenges in recent quarters, the company's progress in its International segment, the growth of new customer cohorts in North America, and its focus on enhancing the customer experience through product innovations suggest that Groupon is taking the necessary steps to navigate the evolving e-commerce landscape. The recent financing deal also provides the company with additional financial flexibility to execute on its transformation strategy.

As Groupon continues to adapt and innovate, investors will be closely watching the company's ability to drive sustainable growth, improve customer retention, and capitalize on the opportunities presented by the rapidly changing e-commerce industry. The company's ability to meet its guidance and successfully navigate the challenges in its North American market will be crucial factors in determining its future success.