Groupon rises; profit tops estimates as marketing costs drop

Groupon Inc. shares rose the most since the first day of trading after the largest daily-deal website reported first-quarter profit that topped analysts' estimates, helped by lower marketing costs and expanded international sales.

Profit excluding certain costs was $16.3 million, or 2 cents a share, the Chicago-based company said in a statement yesterday. Revenue jumped 89 percent to $559.3 million from $295.5 million a year earlier. Analysts on average had projected profit of 1 cent on sales of $530.6 million, according to data compiled by Bloomberg. The shares surged as much as 18 percent.

The coupon site is attempting to rebuild investor confidence after shares dropped more than 40 percent since its November initial public offering, one of the worst public market debuts for a Web company since the dot-com crash. International sales more than doubled to $320.7 million, suggesting Groupon hasn't been hindered by economic turmoil in markets outside the U.S., said Clayton Moran, an analyst at Benchmark Co.

"Groupon is not showing any signs of impact from the European recession," said Moran, who is based in Delray Beach, Florida, and recommends buying the stock. "All in all, it appears like the business continues to have solid growth."

Groupon shares soared 22 percent to $14.36 at 9:32 a.m. in New York, and earlier touched $14.93 for the biggest gain since Nov. 4, 2011. The stock had dropped 43 percent this year before today.

Second-quarter revenue will be $550 million to $590 million, Groupon said in the statement. Analysts on average had estimated $558.7 million in sales.

Marketing Expenses

The company generates sales by selling discounts - known as Groupons - from businesses such as restaurants and nail salons. It then splits the revenue with the businesses.

Marketing costs dropped to 21 percent of total revenue in the first quarter, from 32 percent in the preceding period and 78 percent a year earlier, Groupon said in a slide presentation accompanying the results. The company is getting better at adding subscribers to its email list for less money, Chief Financial Officer Jason Child said.

"We got a lot of leverage from reduction in marketing expenses," Child said in a telephone interview yesterday. "We're getting much more efficient with our paid marketing, and our organic customer growth continues to stay strong."

Groupon had an operating profit of $39.6 million in the first quarter, compared with an operating loss of $117.1 million a year earlier.

The stock lost 48 percent of its value in its first six months on the public market, a period that ended on May 3. Since 2001, only four companies have performed worse among newly public U.S. Internet stocks.

International, Mobile

Groupon generated 57 percent of its revenue outside the U.S. in the first quarter. Almost 30 percent of Groupon's transactions in North America were completed on mobile phones in April, up from 25 percent four months ago, Chief Executive Officer Andrew Mason said in a letter to shareholders last week.

In February, Groupon reported fourth-quarter operating income of $15 million, yet later reversed that into an operating loss of the same amount after restating results because of higher refunds to merchants. At the time of the restatement in March, Groupon said it discovered a "material weakness" in its financial controls.

The company has worked to address the weakness in its financial controls and will be prepared for auditors to test them again at the end of the year, Child said.

"Over the next quarter or two we will have implemented all the steps necessary in terms of hiring people, upgrading our systems and improving our processes," Child said.

The company's first-quarter net loss narrowed to $11.7 million, or 2 cents a share, from $146.5 million, or 48 cents, a year earlier.

Last month, Groupon said Starbucks Corp. CEO Howard Schultz left its board, and the company added Daniel Henry, the finance chief of American Express Co., and Robert Bass, a vice chairman of Deloitte LLP, as directors.