Groupon’s International Business Is A Spoiler So Far

Groupon (NASDAQ:GRPN) released its earnings for the first quarter of 2013 on May 8. It reported an 8% increase in revenues to $601 million which largely came from the North American segment that recorded revenue growth of 42% y-o-y to $340 million. This growth was negatively impacted by the continued underperformance of its international business which saw a revenue decline of 18% to $262 million. However, if Groupon is able to replicate the success of its mobile business in North America in Europe and Asia, it could accelerate its long-term growth. Around 7 million out of the total 40 million downloads of Groupon’s app to date happened in Q1, and we expect this growing mobile adoption to drive near-term growth for the company.

Another positive from the quarterly results was that consolidated net loss declined 66% to $4 million from $11.7 million a year ago.

Check out our complete analysis of Groupon

Highlights and Outlook

The biggest positive for Groupon this quarter was the 4% growth in gross billings, which represents the total dollar value of purchases before Groupon pays merchants their cut. While gross billings in the North American segment grew 23%, that for the international segment declined by 9%.

For Q2 2013, Groupon expects revenues between $575 million and $625 million. Income from operations excluding stock-based compensation and acquisition related expenses is expected between $20 million and $40 million. As the company works towards streamlining its international business along the lines of its North American business, we expect revenues to grow.

Mobile Presence Supports North American Growth

Mobile drove the transformation of Groupon’s business in North America. In March 2013, around 45% of North American transactions were completed on mobile devices in comparison to nearly 30% in March 2012. With nearly 7 million downloads of its total 40 million downloads coming in Q1 alone, we expect mobile to drive Groupon’s growth in the future.

The average spend per active customer, which reflects total gross billings generated in the trailing twelve months per active customer, was $151 as of Q1 2013. This figure was lower than $156 reported in Q1 2012 but was up from $148 in Q3 2012. During the same period, the share of North American customers to TTM (trailing twelve months) total active customer mix grew to 44% in comparison to 40% in Q1 2012. We believe that this is a direct result of the popularity of Groupon’s mobile applications which aren’t available in most of the countries overseas currently.

We expect the international business to see a transformation similar to that of North America as the app is launched in other countries. Groupon is also trying to make itself more mobile-friendly by adding search to its app. Improved search features could lead to better deal matching with customers on its “marketplace” – a searchable bank of ongoing deals.

International Business Decelerates

The international segment revenues declined 18.4% from a year earlier to $261.8 million due to the company’s struggles to turn around its European business. Groupon is currently in the process of rolling out a deal personalization technology, a mobile app and a search feature in these markets which could result in performance similar to that in North America. We expect that the push towards mobile and the “One Playbook” strategy to consolidate systems will help the company achieve international growth.

We have a revised $5 Trefis price estimate for Groupon, which stands 11% below its current market price.

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