Groupon Beats Expectations on Domestic Growth, Lower Costs

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Investors who snapped up Groupon shares on Friday certainly snagged a deal. After reporting earnings after the bell Monday, the online deals service's shares climbed, gaining some 33 percent since Friday’s close.

The after-hours action extended today’s rally—Groupon's stock soared 18 percent as 14.7 million shares traded hands—the heaviest trading of the stock since its IPO on November 4. Investors were betting on growth, and that’s exactly what Groupon’s earnings revealed.

Groupon’s first-quarter revenue was $559 million, up 89 percent from the year-earlier quarter and beating expectations by $28 million. Adjusted earnings of two cents per share beat expectations by a penny. The company ended the quarter with 36.9 million active customers, 140 percent more than a year ago, and a million-plus more than expectations. And in a sign of health for the business model, more than half of the offers in the quarter were from merchants who had already offered a deal on Groupon.

Domestic growth drove the upside surprise: North American revenue grew 75 percent. This matters to investors because this is the strongest growth the company has seen in North America in a year—and a sign that the company doesn’t have to look entirely overseas for growth.

The other key headline in Groupon’s numbers: the company’s more efficient at marketing. And keeping marketing costs under control means that the company can grow margins—which this quarter were 41 percent, up a percentage point from the prior quarter—higher than expected. A Groupon spokesperson points out that marketing costs as a percentage of revenue continues to decline—both from the year-ago quarter and from the prior quarter—while the company adds the same number of subscribers this quarter as last quarter.

Groupon is in a crucial place of establishing credibility: Last month, it restated fourth-quarter revenue with lower earnings and revenue numbers. After a slew of accounting issues and SEC probes, the company needs to reassure investors that its business model works and will be able to fend off the dozens and dozens of rivals. Groupon believes that its sheer reach is what best distinguishes its deals—and its stock. This quarter’s results indicate that being the biggest player in the sector does have its advantages.

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