Groupon just reported Q2 earnings that were essentially in line with Wall Street’s expectations (revenue was slightly light, operating income slightly ahead).More importantly, the company reported a bona fide profit for the first time in its recent history.
But the stock instantly tanked.
In part because the company’s outlook was slightly below Wall Street’s expectations.
But more so because of a detail that was not obvious:
Groupon’s “billings,” the total value of the merchandise sold to customers (less expected returns), declined from last quarter.
This is because Groupon’s core business, coupons, is now shrinking.
Groupon’s recorded revenue in the quarter increased modestly from from last quarter, from $559 million to $568 million, which is ostensibly reassuring. It looks as if Groupon is still growing despite spending less on marketing than it used to.
But all of this growth (and then some), unfortunately, is coming from a new business in which Groupon recognises revenue differently than in its core business. With some “Goods” sales, Groupon is recognising the total value of the item sold, not just the value that Groupon gets to keep after it sells a coupon.
Groupon’s “direct” sales grew $46 million in Q2, from $19 million in Q1 to $65 million in Q2. This new business therefore accounted for more than all the growth in the quarter. (The core business shrank by $37 million). The new “direct” business and revenue recognition, therefore, is making it look like Groupon’s revenue growth is accelerating, when, on a “billings” basis, it isn’t.
Specifically, in Q2, Groupon’s total “billings” were $1.29 billion. In other words, Groupon sold $1.29 billion of merchandise and coupons in the quarter.
In Q1, meanwhile, Groupon’s total billings were higher: $1.355 billion.
This means that Groupon’s gross billings, the total value of the merchandise and coupons it actually sells, shrank in the quarter, despite Groupon’s recent introduction of much-higher-priced merchandise.
UPDATE: Groupon’s PR team points out that the change in the value of the dollar knocked $75 million off of Groupon’s international gross billings. Adjusting for this, Groupon’s gross billings in the quarter were basically flat.
This trend can be seen very clearly in the company’s year-over-year results.
In Q1, Groupon’s gross billings grew 102% year over year.
In Q2, this growth rate shrank to 38%.
At that rate of deceleration, it will soon go negative.
This is why Wall Street is now only willing to pay 2X revenue for Groupon, despite the fact that it is now solidly profitable and has $1.2 billion in cash.
SEE ALSO: Groupon Stock Tanks On Revenue Miss