Groupon Inc. (GRPN - Analyst Report) reported third-quarter earnings per share of 4 cents (including stock-based compensation, acquisition-related expenses and tax impact), which compared favorably with the Zacks Consensus Estimate of 4 cents loss per share and grew from earnings of a penny in the year-ago quarter.

Excluding stock-based compensation, amortization of acquired intangible assets and acquisition-related expense, the company reported earnings per share of 3 cents as against earnings of 2 cents in the year-ago quarter.

Groupon Inc - Earnings Surprise | FindTheBest

Revenues

Revenues jumped 27% year over year to $757 million, which beat the Zacks Consensus Estimate of $747 million. The year-over-year growth was primarily driven by a 78.6% surge in direct revenues and 1.2% growth in third party and other revenues in the reported quarter.

Region-wise, revenues from North America, EMEA and Rest of World (Asia-Pacific and Latin America) increased 16%, 55.5% and 25.8% year over year, respectively.

Gross billings increased 38.6% year over year to $1.86 billion. Region-wise, billings from North America, EMEA and Rest of World increased 16.4%, 10.4% and 154.8% year over year, respectively.

As of Sep 30, 2014, active customers increased 24% year over year to 52.7 million, comprising 23.5 million in North America, 14.9 million in EMEA and 14.3 million in Rest of World.

At the end of the quarter, on an average, active deals were over 300K globally, compared with more than 240K at the end of third-quarter 2014. North American active deals increased to over 120K.

Groupon reported that over 50% of the worldwide transactions took place through mobile devices. Moreover, more than 100 million people downloaded Groupon’s mobile app during the quarter, which led to a robust mobile business.

Margins

Gross margin decreased from 60.4% to 50.2% in the quarter due to unfavorable business mix. Operating expenses increased 11.1% year over year to $385.9 million due to higher selling, general & administrative as well as marketing expenses. As a result, operating loss was $5.4 billion as against operating profit of $13.8 million in the year-ago quarter.

Balance Sheet

Groupon exited the third quarter with cash and cash equivalents worth $855.2 million compared with $1.14 billion reported in the year-ago quarter. Cash outflow from operating activities was $2 billion compared with cash flow from operating activities $40.2 million generated in the previous quarter.

Free cash outflow was $25.4 million compared with $27 million in the previous quarter. The company spent $8.3 million on share buyback during the quarter.

Outlook

For the fourth quarter of 2014, Groupon forecasts revenues in the range of $$875 to $925 million.

Groupon expects adjusted EBITDA in the range of $80 to $100 million for the quarter. Management expects to report earnings of between 2 cents and 4 cents. The Zacks Consensus Estimate for the fourth quarter earnings is currently pegged at 2 cents per share.

Our Take

We believe that Groupon is well positioned to gain from the rising e-Commerce spending on mobile devices, a profitable domestic market and an underpenetrated international market. We expect these opportunities to continue to drive top-line growth. Moreover, increased traction in the mobile business is another positive for the company.

However, Groupon’s back-end loaded EBITDA guidance is a major concern. We note that in North America, the company continues to face significant competition not only from the stalwarts like eBay (EBAY - Analyst Report) and Amazon.com (AMZN - Analyst Report) but also from small companies like LiveDeal, which is a major near-term headwind.

Currently, Groupon carries a Zacks Rank #3 (Hold).

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