Low marketing spend, good traction propel Groupon to Q1 profit; Shares surge

Groupon Inc posted its first quarterly profit by reining in marketing spending and signing up more customers and merchants, sending its stock about 18 per cent higher.

The fledgling company started by music graduate Andrew Mason, which had lost half its value this year on concern about waning demand for its daily deals and persistent accounting problems, on Monday surpassed Wall Street's expectations for earnings and revenue growth.

The Chicago-based company revised fourth-quarter results at the end of March, admitting to "material weakness" in its financial statements and triggering a stock price slide. Even taking into account Monday's surge, the shares remain well below $20 initial public offering level in November.

Mason, who was criticized last year for heavy spending, told analysts on a conference call he wanted to expand Groupon's mobile business, while using rewards programs and other technology to attract and retain merchants and customers overseas.

He said the company will release new mobile application software in coming months, now that about a third of North American transactions happen on smartphones and other mobile devices.

"Revenue growth was impressive and they also had material margin expansion," said The Benchmark Company analyst Clayton Moran. "There are no signs of competitive pressure in this report. The take rate of 41 per cent is very encouraging. Investor fears around competition and sustainability have been overdone."

The after-hours rally to about $13.83 followed a gain of more than 18 per cent in regular trading on Nasdaq, its largest single-day gain since it went public in November. Analysts said short sellers scrambled to cover their positions, anticipating better-than-expected results after the bell.

If both gains were combined, they would equate to a 36 per cent gain from last week's close of $9.90.

Take Rate

Groupon's take rate - which measures how much of the money it keeps after sharing cash with merchants running its deals - has also been a focus for investors.

The take rate peaked at 44 per cent in the first quarter of 2011 and some on Wall Street expect it to decline as Groupon faces competition from Amazon.com Inc, Google Inc, LivingSocial and some merchants ask for bigger cuts.

Chief Financial Officer Jason Child said the take rate in the first quarter rose to 41.3 per cent from 40 per cent in the previous quarter.

Traction

Groupon said it now had 36.9 million active customers. And it served more than 100,000 unique merchants in the first quarter - crossing that threshold for the first time.

"Revenue came in much higher than expected and margins were higher," said Sameet Sinha, an analyst at B. Riley & Co.

"The domestic side of Groupon's business did well," he added. "They may be doing a better job of marketing or their new businesses may be gaining traction."

Groupon's operating profit margin was 7 per cent in the first quarter, while Wall Street was looking for a 6.5 per cent margin, Sinha noted.

North America Growth

Analysts have been particularly concerned that growth was slowing in Groupon's relatively more mature North American business. However, Groupon said on Monday that first-quarter North America revenue rose 33 per cent from the previous period - the strongest growth in a year.

That was partly driven by new technology, such as SmartDeals, which makes the company's daily deals more relevant. The company is also running more deals closer to customers. Increased relevance and especially proximity make it more likely customers will purchase, Chief Executive Andrew Mason said.

Groupon is rolling this technology out in other countries now and that should help the company's international business, beginning around the third quarter, Mason added.

Lower Marketing Spending

Groupon reported first-quarter pro-forma net income, which excludes option expenses, of 2 cents per share, versus a net loss of 41 cents a share, a year earlier. Revenue was $559.3 million, compared with $295.5 million in the first quarter 2011.

It was expected to make 1 cent per share in pro-forma first-quarter earnings, according to Thomson Reuters I/B/E/S. Net revenue was forecast to be $531 million.

Child said lower marketing expenses helped drive profitability. Marketing costs dropped to $117 million in the first quarter from $230 million a year earlier.

Groupon got more efficient at marketing, adding the same number of customers in the first quarter as it did in the previous three months while spending less, Child explained.