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Groupon closes at new low after ‘cash burn’ warning

Groupheadquarters Chicago.

Groupon headquarters in Chicago.

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Updated: September 19, 2012 6:06AM



Groupon shares sank to a new low of $4.75 Friday, closing down 5 percent, after an analyst warned that the Chicago-based daily deals company could face a “cash burn” and lowered his outlook on the stock to $3 from $6.50 a share.

Citing Groupon’s earnings report earlier this week, Evercore analyst Ken Sena wrote in a report to investors that his concerns were validated about Groupon’s cash flow and its “goods” business, the latter in which the company sells jewelry, movie tickets and other discounted products at lower profit margins than its daily deals business.

Groupon’s stock had sunk as low as $4.51 earlier Friday. Since Tuesday, after Groupon issued a disappointing earnings report late Monday, Groupon’s shares have steadily dropped.

Groupon has now lost 76 percent of its value since it went public at $20 a share last November.

Sena said Groupon’s accounting of its operating cash flow from payments Groupon receives from merchants offering the daily deals, known as Groupons, has shrunk to “just $32 million” in the latest quarter, compared with $380 million in 2011.

If those billings declines continue, the cash burn could outweigh Groupon’s growth in income earned, Sena warned.

Groupon makes money by selling the discounts to businesses such as restaurants and nail salons. It splits the revenue with those businesses. Groupon generates working capital by collecting money upfront from the people who buy its daily deals, and then waits at least 30 days to pay its merchant partners who offer the deals.

“In 2011, ‘changes in accrued merchant payables,’ at $380 million, was by far the largest component of Groupon’s positive $290 million operating cash flow,” Sena wrote in his note. “This ... figure has shrunk to just $32 million for the first six months of 2012.”

Bottom line, Sena says: On an apples-to-apples basis, it’s a decline to $32 million from $217 million.

Sena described Groupon’s “future cash position” as “potentially tenuous.”

“Should billings declines persist, we see a potential for cash burn as Groupon would find itself in a situation where it would be paying cash to merchants on a larger (prior) business scale relative to the cash it would be collecting,” Sena wrote.

Groupon’s earnings report on Monday showed $568.3 million in quarterly revenue — 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 more than 1 million users to bring its total to 38 million.

Groupon also revealed in its earnings call on Monday 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.

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.

Sena also lowered Groupon’s “take rate” — the number of people taking Groupon offers. If the Groupon Goods business is stripped out of the equation, Sena believes the “take rate” on Groupon deals will be 35 percent in the next five years, rather than his earlier forecast of 40 percent.

A separate report out this week from Yipit, a daily deal aggregator, said Groupon’s second-quarter share of North American deals declined to 53 percent from 56 percent in the first quarter, while rival LivingSocial.com increased its share to 22 percent from 20 percent. AmazonLocal.com’s share inched up to 2 percent from 1 percent.

A Groupon spokesman said Friday that the company has been generating positive free cash flow for the past eight straight quarters, including the most recent quarter, and it has $1.2 billion in cash on its balance sheet.

Groupon CEO Andrew Mason, whose leadership is under criticism by analysts, told the Wall Street Journal on Friday that Groupon’s performance has been strong throughout its four years of existence, and that he is happy to do what the company board and shareholders think is in Groupon’s best interest.

“I love Groupon,” he said in a video interview posted online. “Groupon is my life.”

Mason said Groupon has become a “grown-up e-commerce business” and because of that, should be judged by year-over-year results rather than quarter-over-quarter results.

“As long as we focus on execution and making our customers happy, over time, we will deliver the results,” he said.

Mason said one-third of Groupon’s discount-coupon transactions are now done through customers’ mobile devices, and that that’s one area on which the company intends to capitalize.

The company’s next move will be improving its website experience so customers can easily find Groupon deals in their areas.

“You will see us evolve our site experience to unlock our inventory,” he said.

Contributing: David Roeder



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