Overview

Groupon's 3rd quarter 2011 financials have just been filed this morning.  PrivCo.com has crunched the numbers.  Summary: Good headline, business still rotten.  Aside from slashing marketing spending late-quarter for pre-IPO window dressing, all of the company's business metrics have taken a sequential tumble - again.  Revenue grew by single digits (just 9.5%) in the quarter sequentially for the first time in the company's history.  Groupon's daily deals % revenue share plunged 5 percentage points in the current quarter from the 2nd quarter (from 42.2% to just 37.1%, down from nearly 50% a year ago); revenue per user falls again to just $1.10/month, down from over $5.30/month 2 years ago and $4/month a year ago (and down another 16% sequentially, from $1.30 to just $1.10, an all-time low).  Fair value estimate of just $8/share, though IPO will proceed at new reduced target price of $16-$18/share and likely final price at $19-$20/share and trade above that level as Groupon issues a groupon to potential IPO investors good for "2/3rds off Groupon shares."  

FOR THE FULL PRIVCO PRIVATE COMPANY FINANCIAL REPORT: GROUPON INC. PLEASE SEE:

http://www.privco.com/private-company/groupon-inc

PrivCo.com Analysis of The Data from Groupon's 3rd Quarter 2011 Financials

 
- All of the company's key business metrics continued to deteriorate further in the most recent third quarter ended Sep. 30: 
 
- Revenue grew by single digits (just 9.5%) in the quarter sequentially for the first time in the company's history, showing a stunning slowdown for what had been a hyper-growth story.  Groupon's prior sequential quarterly revenue growth:
 
  • 112% (3rd quarter 2010)
  • 110% (4th quarter 2010)
  • 71% (1st quarter 2011)
  • 33% (2nd quarter 2011)
  • 9.5% (3rd quarter 2011)
- Groupon Experiences Substantial Deteriation In Its % of Each Deal Received by Groupon: Groupon is under intense competition from hundreds of local daily deals providers, and major players Google Inc.'s Google Offers, and privately-held Living Social, financially backed by Amazon.com.  Providers including Google and Living Social have been competing by offering merchants as little as a 20% revenue split (80% to merchants) vs. Groupon's traditional 50% revenue share.  The result has been a stunning sequential deterioration in Groupon's Deals % Share, as Groupon has increasingly been forced to lower its revenue share to try and match competitors.  PrivCo.com analysis of Groupon's S-1 amendment today shows the following Deals % Share (revenues / gross billings), showing disturbing sequential plunge, including a full 5 percentage points from this year's 2nd quarter to its 3rd quarter:
 
  • 44.2% (1st quarter 2011)
  • 42.2% (2nd quarter 2011)
  • 37.1% (3rd quarter 2011)
- Revenue per user falls again to just $1.10/month, down from over $5.30/month 2 years ago and $4/month a year ago (and down another 16% sequentially quarterly, from $1.30 in 2nd quarter to just $1.10 in the 3rd quarter, an all-time low due to competitor offerings, poor user experiences, and email list quality deterioration)
 
- Groupon short-term liabilities ballooned, from under $690 million on June 30 to $766 million on September 30, an over $75 million increase in short-term liabilities in just 3 months, despite adding just $33 million revenue.
- Imminent Liquidity Crisis is Forcing an IPO at All Costs Strategy: Virtually all of Groupon's short-term liabilities due within weeks; $465 million of the amount was "merchant payables" - cash owed to its merchants for their share of groupons - up from just $392 million 3 months earlier.  So revenue grew in single digits, but merchant payables grew nearly 20%, meaning groupon simply didn't pay its merchants at quarter's end so cash wouldn't plunge.
- Cash on hand grew by just $18 million from June 30 (again all of it and more simply by not paying its bills at quarter's end)
- Groupon dialed back marketing spend by over $40 million late in the 3rd quarter to try and achieve just a single quarter at break-even before the IPO (yet still posted a loss of over $10 million)
 
- The headline improvement of "net loss down" was entirely due to a late-quarter slashing of marketing spend by $40 million, which was clearly just window dressing pre-IPO.  Still, this move hit Groupon's revenue hard...revenue grew in the single digits sequentially for the first time ever.  "This demonstrates that Groupon's marketing spending requirements are not transitory, but an ongoing necessary expense," says Sam Hamadeh, CEO of PrivCo.com LLC, the private company financial data provider.
 
- A Groupon that is now right-sizing rather than growing, and attempting to struggle to break even will clearly have to cease growing and probably shrink in size to do that, slashing marketing spending, staff, and closing many of its 170 local markets that are unprofitable.  "That's an entirely different company and investment proposition, not a hypergrowth story, and it warrants a valuation of perhaps 4x revenue (at most $6.5 billion at PrivCo.com estimated 2011 Groupon revenue of $1.6 billion) or 30x its best case steady state net income (10% of $1.6 billion a year without further growth = $160 million per year in profits...at a 30x multiple, which is aggressive for a company that isn't growing, Groupon is worth just $4.8 billion, or less than $8/share, less than half the current targeted public offering of $16-$18/share," says PrivCo.com CEO Sam Hamadeh).  The fact that the 3 founders will continue to control the company through a new super-voting 150-to-1 voting class of Class B stock, despite being minority shareholders -- and this after cashing out hundreds of millions of dollars from the company's coffers earlier this year - must also be considered a red flag.
 
Having said that, PrivCo.com believes that given that Goldman and the numerous other many co-underwriters will be able to push through Groupon's IPO in November at the targeted $10 to $12 billion valuation, or $16 to $18 per share (likely final pricing at above that at $19-$20/share to generate positive buzz) and that Groupon will take the reduced terms because it has no other choice given its financial condition.  And we believe that the stock will probably pop up at first when it opens for trading, given the millions of small investors who have heard of the company, but don't know any better.  (It's difficult to blame small investors for buying the stock went it ceases being a private company and finallly goes public...Groupon's IPO filings have been labyrinths of legalese, with red flags hidden in massive 400+ page documents, its S-1 amendments have been almost too many to count, each containing stunning new disclosures, accounting changes, new risk factors, new disclosures of insider selling, a new 150-to-1 super-voting class for insiders, new and deteroriating financials, slowing growth, and more.
 

FOR FULL PRIVCO PRIVATE COMPANY FINANCIAL REPORT: GROUPON INC. PLEASE SEE:

http://www.privco.com/private-company/groupon-inc


[OCTOBER 7th PRIVCO FINANCIAL DATA ANALYSIS ON GROUPON BELOW]

 

FOR THE FULL PRIVCO PRIVATE COMPANY FINANCIAL REPORT: GROUPON INC. PLEASE SEE:

http://www.privco.com/private-company/groupon-inc

PRIVCO.COM OCTOBER 7, 2011 UPDATE:

Groupon filed yet another amendment to its IPO.  Among the shocking changes were that Groupon was forced by the SEC to reduce its revenues by more than half (recognizing only its share of merchant deals sold, not the full amount).

We also see in Groupon's latest S-1 (IPO filing) spelled out most clearly for the first time how much Groupon relies upon for short term cash from slowly paying its merchants (note again that Google Offers now pays merchants within 4 days, and has ample cash to do so):

Groupon again fine tunes the amount it has used to buy back stock - now up to $941.7 milllion used to cash out insiders - when the company's operations needs the cash (to put it mildly):

Liquidity and Capital Resources

       As of June 30, 2011, we had $225.1 million in cash and cash equivalents, which primarily consisted of cash and money market accounts.

       Since our inception, we have funded our working capital requirements and expansion primarily through private sales of common and preferred stock, yielding net proceeds of $1,112.9 million. We used $941.7 million of the proceeds from these sales to redeem shares of our common and preferred stock, and the remainder to fund acquisitions and for working capital and general corporate purposes. We used a significant portion of the net proceeds received from our private offerings to redeem shares because management and the board of directors determined that projected cash flow from future operations would be sufficient to support our growth strategy. As a result, we have funded our working capital requirements primarily with cash flow from operations to date. We generated positive cash flow from operations for the years ended December 31, 2009 and December 31, 2010 and the six months ended June 30, 2011 despite experiencing net losses in each of these periods, and we expect annual cash flow from operations to remain positive in the foreseeable future. We generally use this cash flow to fund our operations, make additional acquisitions, purchase capital expenditures and meet our other cash operating needs. Cash flow from operations was $7.5 million for the year ended December 31, 2009, $86.9 million for the year ended December 31, 2010 and $58.0 million for the six months ended June 30, 2011.

       Although we can provide no assurances, we believe that the net proceeds from this offering, together with our available cash and cash equivalents balance and cash generated from operations, should be sufficient to meet our working capital requirements and other capital expenditures for the next twelve months.

It's also clear that Groupon must invest heavily to support its international acquistiions and expanded (Note that Google Offers and privately held Liviing Social, backed by Amazon.com, remain largely U.S. businesses.)

Anticipated Uses of Cash

       Our priority in 2011 is to continue to increase our revenue by increasing the dollar volume of transactions that are processed through our marketplace, coupled with expansion and penetration into new domestic and international markets.

       In our North America segment, we intend to continue to invest to acquire subscribers, to expand our salesforce and aggressively market our products. We also intend to acquire or make strategic investments in complementary businesses that add to our subscriber or customer base or provide incremental technology.

       In our International segment, we also intend to continue to invest to acquire subscribers, to expand our salesforce and aggressively market our products. We also intend to acquire or make strategic investments in complementary businesses that add to our subscriber or customer base or provide incremental technology.

       In order to support our overall global expansion, we expect to make significant investments in our corporate facilities and information technology infrastructure, with approximately $65.0 million of capital expenditures planned for the year ending December 31, 2011.

       We currently plan to fund these expenditures in our North America and International segments with cash flows generated from the respective operations during this period. We also may use a portion of the net proceeds from this offering to fund these expenditures. We do not intend to pay dividends in the foreseeable future.

Cash Provided By (Used In) Operating Activities

       Our net cash flow from operating, investing and financing activities for the periods below were as follows:

  Year Ended December 31, Six Months Ended June 30,
  2008 2009 2010 2010 2011
      (in thousands)    
Cash provided by (used in):          
Operating activities $ (1,526) $ 7,510 $ 86,885 $ 15,528 $ 57,984
Investing activities (19) (1,961) (11,879) 1,869 (70,503)
Financing activities 4,408 3,798 30,445 16,725 111,684
Effect of changes in exchange rates on cash and cash equivalents — — 1,069 (516) 7,095
Net increase in cash and cash equivalents $ 2,863 $ 9,347 $ 106,520 $ 33,606 $ 106,260

 

 

Cash Provided By (Used In) Operating Activities

       Cash provided by (used in) operating activities primarily consists of our net loss adjusted for certain non-cash items, including depreciation and amortization, stock-based compensation, deferred income taxes, acquisition-related expenses and the effect of changes in working capital and other items.

       Our current merchant arrangements are structured such that we collect cash up front when our customers purchase Groupons and make payments to most of our merchants at a subsequent date. Under our traditional merchant payment model, we pay our merchants in installments over a period of generally sixty days for all Groupons purchased. Under this payment model, merchants are paid regardless of whether the Groupon is redeemed. Under the redemption payment model, which we utilize in most of our international operations in conformity with local market practice, merchants are not paid until the customer redeems the Groupon that has been purchased. If a customer does not redeem the Groupon under this payment model, we retain all of the gross billings for the Groupon purchase. As a result of these payment models, we experience swings in merchant payable that can cause volatility in working capital levels and impact cash balances more or less than our operating income or loss would indicate. In general, merchant payable balances have increased in line with the growth of our overall business, which has created additional cash flow from operations. Furthermore, growth in our international operations has accelerated cash flow due to more favorable payment terms with our merchants. The redemption model generally improves our overall cash flow because we do not pay our merchants until the customer redeems the Groupon. To the extent we offer our merchants more favorable or accelerated payment terms or our gross billings does not continue to grow in the future, our cash flow could be adversely impacted.

       For the six months ended June 30, 2011, our net cash provided by operating activities of $58.0 million consisted of net loss of $223.7 million, offset by $77.8 million in adjustments for non-cash items and $205.4 million in cash provided by changes in working capital and other activities. Adjustments for non-cash items primarily consisted of an increase in cash due to $57.6 million in stock-based compensation expense, $5.0 million in depreciation expense on property and equipment, $10.7 million in amortization of intangible assets and $8.8 million in losses in equity interests, partially offset by an excess tax benefit on stock-based compensation of $3.5 million and deferred income taxes of $2.2 million. The increase in cash resulting from changes in working capital activities primarily consisted of a $216.9 million increase in our merchant payable, due to the growth in the number of Groupons sold, and a $74.8 million increase in accrued expenses and other current liabilities primarily related to online marketing costs incurred to acquire subscribers and operational expenses such as payroll and benefits, customer refunds, costs associated with subscriber loyalty and reward programs, and a $1.6 million increase in other assets and liabilities. These increases were partially offset by a decrease in operating cash flow due to a $14.4 million decrease... continue reading the amended Groupon S-1.

All of the above demonstrates, per PrivCo.com Inc research, that Groupon is badly in need of cash, that its sold cash flow being "generated" is purely the result of short term delays in paying in merchats, as well as (for international sales) simply choosing to keep the entire sum of unused or exired Groupons, whether lawful  in that country or not, and the cash shortage of which has been exacerbated - to say the least- by sending $941 million out the door to cash our founders and early investors.  And the company now finds itself in a bit (or a lot) of a pickle.  

Given Groupon's imminent liquidity crisis, PrivCo expects Groupon to regardless attempt to proceed with an IPO, although at a far lower valuation than its previously floated $30 billion.  (Note: Update October 19, 2011: Groupon indeed is proceeding with an IPO attempt at a drastically slashed valuation of approximately $10 billion.)

FOR THE FULL PRIVCO PRIVATE COMPANY FINANCIAL REPORT: GROUPON INC. PLEASE SEE:

http://www.privco.com/private-company/groupon-inc

 

About PrivCo

PrivCo Media, LLC (www.privco.com) is the premier source for business and financial data on major privately held companies. PrivCo publishes exclusive financial data on over 209,150 private companies, as well as details on over 79,243 private company deals, including private company M&A deals and multiples, venture capital investments, private equity buyouts, pre-IPO activity, restructuring, and more.