When Groupon was the privately owned darling of the tech world, all anyone could talk about was its soaring revenues. But when its S1 came out, investors recoiled at the cost of all that revenue. Groupon reported its quarterly earnings today for the second time since going public and, while the picture looked a little better, no one cared.
The company reported 53 percent revenue growth to $586.3 million, but GAAP profits of just $28.4 million — which, in the case of a $5 billion market cap company, just won’t do. Shares were down as much as 20 percent in after hours trading, but have rebounded slightly to a loss of 18 percent at the time of this writing. The current after hours price of $7.55 is down 62 percent from the company’s November 2011 IPO price of $20 per share.
There were two big takeaways from the call: Groupon is moving away from its reliance on emails and daily deals, and it needs to become more driven by automation than by a monster headcount.
Let’s talk about the latter first. Mason acknowledged a 2.6 percent decline in Groupon’s worldwide salesforce this past quarter, following growth of 9.4 percent and 7.1 percent respectively within the department during the preceding two quarters. He elaborated saying that a large percentage of the change represents “sales support staff rather than front line representatives.” Going forward, he anticipates continued increases in productivity and scaling the company further “without commensurate headcount investments.”
Mason referenced replacing “human beings” — a very comradery-inspiring term, if there ever was one — with technological automations as a big driver for the company’s 50 percent reduction in marketing expenditures over the last year. One example he offered was using marketing bid automation tools to eliminate the need for dozens of the aforementioned “human beings” to crunch spreadsheet numbers to calculate channel ROIs.
This echoes rumors we’ve been hearing about increasing turnover and downsizing within the company’s outsides sales staff. One recently-terminated staffer we spoke to in Los Angeles suggested there had been a large-scale liquidation of the department, or even possibly a move away from the outside sales model, although conversations with company spokespersons and comments made on the earnings call seem to downplay the significance of the changes.
“We’re a performance based sales organization so turnover is normal and healthy,” we were told by the spokesperson. “But we still have teams of sales representatives on the ground in all our markets.”
One particular drain on the company has always been its international division, which is sprawling, disorganized, and hemorrhaging cash. This quarter, international hurt the top line too, as Mason and his CFO Jason Child blame macroeconomic conditions and changes in foreign exchange rates for sagging performance.
The executives also talked at length about implementing technology to increase efficiency within existing operations. The company has been developing and rolling out bid automation tools, self-service merchant tools such as schedulers, and email and deal personalization tools.
Mason noted that the company runs “six different technology platforms around the world, each of which are in various states of sophistication.” One of the companies largest opportunities for near- to mid-term growth, therefore, is in integrating the efficiencies achieved in the Groupon’s original North American business throughout the rest of its international operations.
Although Groupon is only four years old, these seem like steps that should have been taken under the cover of private ownership, not under the spotlights of the public markets.
In further evolution of its business model, Mason hinted at “moving beyond email” with plans to develop a true ecommerce marketplace within which customers can search for and discover deals “on their own terms” rather than only on those dictated by the company.
Groupon has already implemented a system it calls Dealbank which more effectively stores unsold inventory from deals offered over time to make them available to customers going forward. The company has seen a 10 times increase in deal offerings over the last six months, from 600 previously at any given time to over 8,000 today.
This plan is reliant on the brand equity Mason feels exists within the Groupon name. “[Customers think of us as a place to] find unbeatable deals on great stuff,” he says. Given the deal fatigue and countless customer service horror stories published over the last four years, this is likely an overly generous assumption.
Particularly revealing was Mason’s continued return to the Groupon Direct or “goods” business unit. Unlike Groupon’s infamous experiential restaurant discounts, spa packages, or skydiving offers, in this category the company sells physical goods such as earrings and yogurt making kits, (Mason’s example, not mine). Groupon takes title to the merchandise in many cases and finds itself competing more with Gilt, Amazon, Fancy, and other more traditional flash sale retailers.
Whether it indicates a feeling that opportunity is declining in the local offers market or simply in the power of diversifying its product offering, Mason repeatedly hammered the investment being made and the growth being achieved in the goods division. He went so far as to say that the company may strategically prioritize its limited “email real estate” in favor of goods rather than local offers for strategic reasons, even if profit margins didn’t dictate such a decision.
One of the most impressive statistics revealed on today’s call was that more than one third of all transactions completed by Groupon’s US customers in July originated from mobile devices — up 35 percent since last quarter. The company believes that its US mobile usage is the greatest percentage of any large ecommerce retailer and points to this statistic as a key advantage and the foundation of its future growth plans.
Groupon is still making “nuts and bolts improvements” to its operations according to Mason. To many in Silicon Valley, and perhaps even on Wall Street, these are the kinds of changes that are best made in the private markets, away from the short-term results driven public company investors.
While few close to the company have been willing to go on record as saying that Groupon went public too early, investor Reid Hoffman told our Sarah Lacy at this month’s PandoMonthly fireside chat that he believes the company made multiple missteps in going public.
Hoffman argues that the Groupon executives failed to prepare properly for the scrutiny and restrictions that the company would face once filing to go public. As Lacy reported previously, it was largely the insistence of acquired copycats the Samwer brothers that led to the rush to IPO.
Regardless of the reasons, Groupon is public today and is finding its sea legs in the public eye. Despite the obvious discontent of the markets, the company is continuing to grow its top line revenues, while focused internally on building a more efficient and sustainable growing business. In nearly every remark, Mason and his fellow executives were careful to state clearly that the changes being implemented are more than one quarter changes and that the results of these efforts may not be immediately apparent.
Following last quarter’s earnings call, our Erin Griffith asked, “Is the Cute Email Company Ready to Be a Real Business?” The one luxury that Groupon and other now-public tech companies do not have is time and investor patience. For the first time, I can now say that the future of Groupon does not look entirely bleak. That said, like the first awkward steps of a toddler, the road ahead is likely to be a bumpy and unpredictable one.
[Image credit, Twinpossible]