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Groupon turns profit, but earnings disappoint analysts



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Updated: September 15, 2012 6:14AM

Not even four years into its life and less than a year after going public, Chicago-based Groupon Inc. is downshifting into an outlook of slower growth, and its earnings news hit its shares hard Tuesday, sending them down 23 percent to a record low of $5.78 down 23 percent.

The trend was inevitable, but it could be coming faster than investors in the coupon merchant expected. Slower growth creates uncertainty about the stock price and raises the specter of “deal fatigue,” a suspicion that people have grown tired of Groupon’s offers inundating their e-mail in-boxes.

The company reported second-quarter earnings Monday that caused its shares to plunge to new lows in after-market trading. The earnings came out after the market’s regular session Monday, and the shares sank 20 percent to $6.07, a new low, from its daytime close at $7.55 Tuesday.

Groupon reported net income of $28.4 million, or 4 cents a share, in the second quarter vs. a year-ago loss of $107.4 million.

The big concern was the revenue number, $568.3 million, short of an analyst consensus of $573 million as reported by market data services, but 45 percent higher than a year ago.

Another issue was Groupon’s slowest growth ever in its customer base. The company said that since the first quarter, it gained just over 1 million users to bring its total to 38 million.

Morningstar analyst Rick Summer noted that the slight gain came despite an $88 million marketing expense for the quarter. “We are seeing a market that is maturing a bit,” Summer said.

He said that to pursue growth, Groupon has two difficult tasks. “You have to grow your customer base pretty dramatically or you have to take more of their wallet,” Summer said.

Summer also said that Groupon management “has built a credibility gap between themselves and investors that they are just starting to address.”

Company executives said they are following through on promises to reduce marketing expenses as a percentage of revenue, now just 15 percent compared with 54 percent a year ago.

Chief executive Andrew Mason said revenue would have been higher except for movement in foreign-exchange rates, which cost $32.4 million for the quarter. Europe, he said in a conference call with analysts, was a “significant drag on performance.”

Mason said the company continues to invest heavily in technology so it gains knowledge of how to structure the best deals.

“We had a solid first quarter despite challenges in Europe and continued investment in technology and infrastructure,” Mason said. “We’ve deepened our relationships with a growing base of customers worldwide, demonstrating progress as we work to unlock the opportunity in local commerce.”

Executives addressed questions about the earnings impact from a division called Groupon Goods, which resells merchandise. Analysts had published criticism that revenue from the division may mask weakness in the core daily-deals business.

Groupon created a new category of revenue, called direct revenue, to break out the Groupon Goods business. It said direct revenue was $65.4 million for the second quarter, vs. $19.2 million in the first quarter.

The second quarter was the first period that direct revenue “was material to Groupon’s overall performance,” the company said in its press release.

In the conference call, Mason described Groupon Goods as the “growth driver” behind improvements in North American results.

Morningstar’s Summer said the explanation was a “good first step” toward transparency about what affects its operations. Groupon Goods, an attempt to compete with Amazon, “is a different business from what Groupon does. It’s not that it’s a bad business, but it’s different,” Summer said.

In Groupon Goods, the company buys merchandise directly and sells it at a discount. It books 100 percent of the sales price as revenue, in contrast to the core coupon business, in which Groupon lists as revenue only the part of the coupon price it does not surrender to merchants.

Looking ahead, Groupon estimated its third-quarter revenue would be $580 million to $620 million, an increase of 35 percent to 44 percent from the same period in 2011. The estimate is close to the Wall Street consensus.

In its first-quarter earnings issued in May, Groupon reported an 89 percent boost in revenue that it attributed to better targeting of customers. Executives made no mention of any meaningful impact from Groupon Goods.

Analyst Ken Sena of Evercore Partners subsequently estimated that Groupon Goods accounted for half of the revenue growth. But on Monday’s call, Groupon Chief Financial Officer Jason Child disputed that, saying Groupon Goods accounted for less than 10 percent of the first quarter earnings improvement.

Groupon went public last November at $20 per share.

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