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Groupon In Major Trouble as Q2 Results Show Plunging Revenue Growth


Given that the daily deals firm has said it's pursuing growth at the expense of profits, it's now hard to see Groupon turning itself around.

Groupon's out with an updated S-1, the highlights of which are continued large losses and revenue growth far below that of recent quarters. In the chart of quarterly operations below, recall that "gross profit" represents the fees Groupon collects on deals, which I shall refer to as real revenue. In the past five quarters, sequential real revenue growth has been 72%, 110%, 112%, 76%, and now 26%.

For a company that boldly said it would pursue growth at the expense of profits, this is a huge red flag. Why? Because the net income picture is still terrible. Net income printed its third consecutive $100 million loss, with no improvement over Q1 despite the continued growth in revenue. Yes, as a percentage of revenue the metrics improved somewhat, but this is possibly the most dynamic part of e-commerce, an industry that's barely two years old with competition rapidly emerging. And anecdotally, as my friend Rocky Agrawal has pointed out, the daily deals space is seeing merchant fatigue and customer fatigue. If revenue trends continue, Groupon might report a sequential revenue decrease in Q3. It is simply running out of time to figure out how to be profitable.

Click to enlarge

The other part of the Groupon story is its continued negative working capital balance, with working capital of -$305 million. As of Q2, Groupon has $225 million in cash and owes its merchants $392 million. It owes merchants that much money because it holds the merchant portion of a Groupon for up to 60 days. This merchant payables line item is up 141% year-to-date. Because merchants have shown little loyalty to daily deals providers, going with whoever offers the best deal (ironic), this is an easy way for competitors to chip away at Groupon's market share, and a liquidity risk down the road. Without merchant payables Groupon would be out of capital.

The biggest problem Groupon has is its conflicting goals. On the one hand, it has its lofty valuation because of its large and growing revenues. On the other, it doesn't have a profitable business model, and needs to address this in a hurry if it wants to survive. If it continues to pursue growth to maintain its valuation it will likely go bankrupt. If it tries to address profitability by performing triage and focusing only on profitable markets and sectors, it would see revenue -- and hence its valuation -- fall significantly. As it is it's already seeing its North American merchant pool fall, as Business Insider reports. It can't win. CEO Andrew Mason for all I know is a great guy, but he's my age -- we're both around 30 -- and I imagine, like me, he has no idea how to reorient a three-year-old company bringing in hundreds of millions of dollars with thousands of employees in order to turn it around. I'm not sure anyone could do that. It's a runaway train with no brakes.

Groupon is still effectively insolvent, and without capital infusions is unlikely to exist in 18 months.

(See also: Groupon Is Overstating Revenue by 140%, Should Voluntarily Postpone IPO)

Follow Conor Sen on Twitter @conorsen

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