Pando

Is Groupon entering a turnaround?

By Kevin Kelleher , written on February 15, 2016

From The Earnings Desk

Startups that are having to apply the brakes during a period when tech is facing a slowdown in both financing and revenue growth may be looking around for case studies in how to manage the transition. Last week offered up a useful one: Groupon.

On Friday, Groupon garnered more attention than it has in a while by surging 29 percent after reporting stronger-than-expected earnings Friday, finishing the week with a market cap of $2.2 billion. So after years of stock declines, is Groupon entering a turnaround? And will it finally deliver on the great promise its early growth hinted at?

The answers to these questions seem to be, respectively, quite possibly and certainly not. One-day earnings moves can be misleading indicators of a stock's future direction (Netflix surged on its earnings last month and has since given up those gains and much more). And besides, Groupon's stock, even after the 29% rise, is still down 64% in the past year and down 90% from its peak level in 2011.

In fact, the very thing encouraging investors last week seemed to be that, under new CEO Rich Williams, the company is doing an encouraging job of scaling back its early ambitions for world domination. Groupon began 2015 operating in 47 countries and by year's end was only in 28, Williams said, before suggesting that this number would keep falling.

In the process, Groupon has cut about 1,000 sales jobs in the past several months, most of them overseas. The company slashed 13 percent of its sales staff in Europe, Africa and the Middle East and 42 percent in other international markets, leading to a $30 million restructuring charge last year.

This is a different game plan from the original one at Groupon, which was not long ago known as the fastest growing company ever. That record growth was measured in revenue, which some calculated to have grown by more than 2,200 percent in 2010, when Groupon's daily deal business was taking off. But Groupon also set another record – not only was it an early unicorn, it was as of last year the fastest company to ever reach a $1 billion valuation.

For that reason alone, Groupon's post-IPO history is worth the attention of younger unicorns. Groupon's early, aggressive growth came by design. It hoped to secure a strong, Amazon-like foothold by moving as quickly as possible into as many markets as possible, even if it increased the risk of failure. Not all unicorns have pursued the hypergrowth strategy charted by Groupon, but Xiaomi and Uber have. And Xiaomi, at least, is showing some signs that bold is not always best.

Part of Groupon's troubles came when its original model of email-driven, time-limited deals faded in popularity. The company pivoted to a search-driven model of longer-lasting deals involving commercial goods, services and travel. The shift into goods drove down profit margins, but it added a more promising area of long-term growth.

Although Groupon is in the midst of a transition, there are signs the pivot and the subsequent scaling-back is turning Groupon into something it's never been before: a company that can generate steady, reliable growth. The value of goods and services sold through Groupon rose only 1 percent last quarter, but it rose 10.7 percent in the core North American markets. Not enough to qualify as the fastest-growing company, but maybe good enough in this market.

There are other metrics arguing Groupon can expect growth - albeit modest growth - in coming years. The number of deals the company offered grew by 97 percent year over year to 650,000 at the end of 2015, while the number of customers who bought a voucher or product in 2015 rose 3 percent to 49 million.

Non-revenue financial measures are mixed, but much better than the big-growth days. Cash generated from operations rose to $292 million last quarter from $252 million a year earlier. But the company swung to an eight-cents-a-share loss from a one-cent profit.

Williams said in a call discussing earnings that the company is not only cutting back on some overseas markets, it's boosting marketing spending in its its remaining markets and as a result saw an increase in active customers last quarter. Groupon expects the value of goods and services it sells to reach a growth rate of 20 percent in two years.

Groupon has exchanged its unattainable dreams of world domination for a much more attainable goal of a niche e-commerce company with pretty-good growth. One outcome of that dramatic adjustment in expectations is that big investors, from hedge funds like Citadel to mutual-fund giants like Fidelity and Vanguard, have taken to the company. On Friday, Alibaba also said it had bought a 5.6 percent stake in Groupon, making it the company's fourth-largest investor.

In a strange way, Groupon's prospects seem brighter than they have in a long time, if only because those prospects are rooted in the real world. Other unicorns worried about how to appeal to investors grown weary from volatility and leery of bold promises might study the company's trajectory and contemplate adjustments to their own expectations.