GROUPON, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under Part II, Item 1A, Risk Factors, and elsewhere in this Quarterly Report. See Part I, Financial Information, Forward-Looking Statements, for additional information. Overview Groupon is a global scaled two-sided marketplace that connects consumers to merchants. Consumers access our marketplace through our mobile applications and our websites, primarily localized groupon.com sites in many countries. We operate in two segments,North America and International, and operate in three categories, Local, Goods and Travel. See Item 1, Note 13, Segment Information, for additional information. Currently, we generate product and service revenue from the following business operations. Service Revenue from Local, Travel, and Goods Categories: Service revenue primarily represents the net commissions earned from selling goods or services on behalf of third-party merchants. Service revenue is reported on a net basis as the purchase price collected from the customer less the portion of the purchase price that is payable to the third-party merchant. We also earn commissions when customers make purchases with retailers using digital coupons listed on our localized groupon.com sites. Product Revenue from Goods Category: We generate product revenue from sales of our first-party Goods merchandise inventory. For product revenue transactions, we are the primary party responsible for providing the merchandise to the customer, we have inventory risk and we have discretion in establishing prices. As such, product revenue is reported on a gross basis as the purchase price received from the customer. Product revenue, including associated shipping revenue, is recognized when the merchandise is delivered to the customer. During 2020, we transitioned to a third-party marketplace inNorth America and we plan to begin the transition to a third-party marketplace in International in the second quarter 2021. In a third-party marketplace model, our merchants generally assume inventory and refund risk, and as such our Goods category will primarily generate revenue on a net basis following our transition. Strategy Our mission is to be the destination for experiences where consumers discover fun things to do and local businesses thrive. Our strategic priorities are to expand our Local inventory and modernize our marketplace by improving the merchant and customer experiences. While both of these are important to building a successful marketplace, in the immediate term, we believe the most critical of these is expanding Local inventory. To validate our strategic priority to expand Local inventory, in mid-2020, we launched a test in four markets inNorth America to determine if growing inventory would result in improved gross billings and unit performance. To grow Local supply, we are focused on leveraging three types of inventory: Deals with fewer restrictions, a new lower discount inventory product called Offers, and Market Rate supply. At the conclusion of our test we determined that we reached our test goals, and we intend to scale elements of our inventory strategy more broadly throughout our marketplace in 2021. InNorth America , we have begun scaling the removal of Deal repeat purchase restrictions to all merchants and the launch of Offers to Beauty & Wellness merchants. To support our strategic priority of improving the merchant and customer experience, we are reducing friction and making it easier for our customers to find, buy, and redeem a Groupon. InApril 2021 , we started to roll out a new customer experience toNorth America app and mobile web users, which we believe will drive engagement, conversion, and customer purchase frequency. On the merchant side, we are continuing to build out tools that will help us be a better partner to our merchants, including our self-service tool, advertising products and booking tool features. COVID-19, Restructuring and Cost Reduction SinceMarch 2020 , the COVID-19 pandemic has led to a significant decrease in consumer demand, a decrease in customer redemptions and elevated refund levels due to changes in consumer behavior and actions taken by governments to control the spread of COVID-19, including quarantines, travel restrictions, as well as business restrictions and shutdowns. The COVID-19 pandemic has had an adverse impact on our financial condition, results of operations and cash flows, which included impairments of our goodwill and long-lived assets in 2020. InApril 2020 , the Board approved a multi-phase restructuring plan related to our previously announced strategic shift and as part of the cost cutting measures implemented in response to the impact of COVID-19 on our business. We expect to incur total pre-tax charges of$75.0 million to$105.0 million in connection with our restructuring plan through the end of 2021. Once fully implemented, we expect our restructuring plan to result in$225.0 million in annualized cost savings. During the three months endedMarch 31, 2021 , we recorded$7.4 million in pre-tax charges in connection with our restructuring actions. See Note 9, Restructuring and Related Charges, for additional information. InMarch 2021 , we entered into the Amended Credit Agreement to extend covenant relief through the fourth quarter 2021 and we issued$200.0 million of convertible notes. See Note 5, Financing Arrangements, for additional information. We plan to continue to actively manage and optimize our cash balances and liquidity, working capital and operating expenses, although there can be no assurances that we will be able to do so. Recovery from the COVID-19 pandemic could be volatile and prolonged given the unprecedented and continuously evolving nature of the situation. The future impact of COVID-19 on our business, results of operations, financial condition and liquidity is highly uncertain and will ultimately depend on future developments, including the magnitude and duration of the pandemic, the protective measures taken to reduce its spread, and the vaccine supply and demand. We continue to monitor the impact of COVID-19 on our business, including the developing situation inIndia , where we operate a shared service center. How We Measure Our Business We use several operating and financial metrics to assess the progress of our business and make decisions on where to allocate capital, time and technology investments. Certain of the financial metrics are reported in accordance withU.S. GAAP and certain of those metrics are considered non-GAAP financial measures. As our business evolves, we may make changes to the key financial and operating metrics that we use to measure our business. For further information and reconciliations to the most applicable financial measures underU.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the Results of Operations section. Operating Metrics •Gross billings is the total dollar value of customer purchases of goods and services. Gross billings is presented net of customer refunds, order discounts and sales and related taxes. The substantial majority of our service revenue transactions are comprised of sales of vouchers and similar transactions in which we collect the transaction price from the customer and remit a portion of the transaction price to the third-party merchant who will provide the related goods or services. For these transactions, gross billings differs from revenue reported in our condensed consolidated statements of operations, which is presented net of the merchant's share of the transaction price. For product revenue transactions, gross billings are equivalent to product revenue reported in our condensed consolidated statements of operations. Gross billings is an indicator of our growth and business performance as it measures the dollar volume of transactions generated through our marketplaces. Tracking gross billings on service revenue transactions also allows us to monitor the percentage of gross billings that we are able to retain after payments to merchants. However, we are focused on achieving long-term gross profit and Adjusted EBITDA growth. •Units are the number of purchases during the reporting period, before refunds and cancellations, made either through one of our online marketplaces, a third-party marketplace, or directly with a merchant for which we earn a commission. We do not include purchases with retailers using digital coupons accessed through our websites and mobile applications in our units metric. We consider units to be an important 27 -------------------------------------------------------------------------------- indicator of the total volume of business conducted through our marketplaces. We report units on a gross basis prior to the consideration of customer refunds and therefore units are not always a good proxy for gross billings. •Active customers are unique user accounts that have made a purchase during the trailing twelve months ("TTM") either through one of our online marketplaces or directly with a merchant for which we earned a commission. We consider this metric to be an important indicator of our business performance as it helps us to understand how the number of customers actively purchasing our offerings is trending. Some customers could establish and make purchases from more than one account, so it is possible that our active customer metric may count certain customers more than once in a given period. For entities that we have acquired in a business combination, this metric includes active customers of the acquired entity, including customers who made purchases prior to the acquisition. We do not include consumers who solely make purchases with retailers using digital coupons accessed through our websites and mobile applications in our active customer metric, nor do we include consumers who solely make purchases of our inventory through third-party marketplaces with which we partner. Our gross billings, units, and TTM active customers for the three months endedMarch 31, 2021 and 2020 were as follows (in thousands): Three Months Ended March 31, 2021 2020 Gross billings$ 553,972 $ 806,399 Units 17,803 29,766 TTM Active Customers 25,754 41,837 Financial Metrics •Revenue is currently earned through product and service revenue transactions. We earn service revenue from transactions in which we generate commissions by selling goods or services on behalf of third-party merchants. Service revenue from those transactions is reported on a net basis as the purchase price collected from the customer for the offering less an agreed upon portion of the purchase price paid to the third-party merchant. Service revenue also includes commissions we earn when customers make purchases with retailers using digital coupons accessed through our digital properties. We generate product revenue from our sales of first-party Goods inventory. Our product revenue from these first-party transactions, which are direct sales of merchandise inventory, is the purchase price received from the customer. During 2020, we transitioned to a third-party marketplace inNorth America and we plan to begin to transition to a third-party marketplace in International in the second quarter 2021. Following the International transition, we expect our Goods category to primarily generate revenue on a net basis within service revenue. •Gross profit reflects the net margin we earn after deducting our cost of revenue from our revenue. Due to the lack of comparability between product revenue, which is reported on a gross basis, and service revenue, which primarily consists of transactions reported on a net basis, we believe that gross profit is an important measure for evaluating our performance. •Adjusted EBITDA is a non-GAAP financial measure that we define as net income (loss) from continuing operations excluding income taxes, interest and other non-operating items, depreciation and amortization, stock-based compensation, acquisition-related expense (benefit), net and other special charges and credits, including items that are unusual in nature or infrequently occurring. For further information and a reconciliation to net income (loss) from continuing operations, refer to our discussion under Non-GAAP Financial Measures in the Results of Operations section. •Free cash flow is a non-GAAP financial measure that comprises net cash provided by (used in) operating activities from continuing operations less purchases of property and equipment and capitalized software. For further information and a reconciliation to Net cash provided by (used in) operating activities from continuing operations, refer to our discussion in the Liquidity and Capital Resources section. 28 --------------------------------------------------------------------------------
The following table presents the above financial metrics for the three months
ended
Three Months Ended March 31,
2021 2020
Revenue $ 263,817 $ 374,150
Gross profit 166,983 201,247
Adjusted EBITDA 30,372 (22,464)
Free cash flow (58,445) (247,004)
Operating Expenses
•Marketing expense consists primarily of online marketing costs, such as search
engine marketing, advertising on social networking sites and affiliate programs,
and offline marketing costs, such as television and radio advertising.
Additionally, compensation expense for marketing employees is classified within
marketing expense. We record these costs within Marketing on the condensed
consolidated statements of operations when incurred. From time to time, we have
offerings from well-known national merchants for customer acquisition and
activation purposes, for which the amount we owe the merchant for each voucher
sold exceeds the transaction price paid by the customer. Our gross billings from
those transactions generate no service revenue and our net cost (i.e., the
excess of the amount owed to the merchant over the amount paid by the customer)
is classified as marketing expense. We evaluate marketing expense as a
percentage of gross profit because it gives us an indication of how well our
marketing spend is driving gross profit performance.
•Selling, general and administrative ("SG&A") expenses include selling expenses
such as sales commissions and other compensation expenses for sales
representatives, as well as costs associated with supporting the sales function
such as technology, telecommunications and travel. General and administrative
expenses include compensation expense for employees involved in customer
service, operations, technology and product development, as well as general
corporate functions, such as finance, legal and human resources. Additional
costs included in general and administrative include depreciation and
amortization, rent, professional fees, litigation costs, travel and
entertainment, recruiting, office supplies, maintenance, certain technology
costs and other general corporate costs. We evaluate SG&A expense as a
percentage of gross profit because it gives us an indication of our operating
efficiency.
•Restructuring and related charges represent severance and benefit costs for
workforce reductions, impairments and other facilities-related costs and
professional advisory fees. See Note 9, Restructuring and Related Charges, for
additional information about our restructuring plan.
Factors Affecting Our Performance
Impact of COVID-19. During the COVID-19 pandemic, actions taken by governments
to control the spread of COVID-19, and changes in consumer behavior have had a
negative impact on our business, which relies on customers' purchases of local
experiences, including events and activities, beauty and wellness, travel and
dining. Recovery from the COVID-19 pandemic could be volatile and prolonged
given the unprecedented and continuously evolving nature of the situation. We
continue to monitor the impact of COVID-19 on our business, particularly in our
International segment where restrictions have been more prolonged and stricter
than in North America , surges in virus cases continue to occur and the
vaccination rollout has been slower. We also continue to monitor the developing
situation in India , where we operate a shared service center.
Attracting and retaining local merchants. As we focus on our local experiences
marketplace, we depend on our ability to attract and retain merchants who are
willing to offer their experiences on our platform. Merchants can generally
withdraw their offerings from our marketplace at any time, and their willingness
to continue offering services through our marketplace depends on the
effectiveness of our marketing and promotional services. Since the widespread
economic impacts of COVID-19 began in March 2020 , we are prioritizing
opportunities to help drive demand for our merchants and highlighting offers
that customers can enjoy right now. As we continue to navigate through the
volatility of the COVID-19 recovery period, we intend to take a market-by-market
approach to attracting and retaining local merchants.
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Driving purchase frequency and re-engaging and retaining customers. In light of
significant declines in consumer demand for local and travel services due to
COVID-19, we must highlight offers that customers can enjoy right now in order
to drive purchase frequency and retain customers. This includes surfacing the
relevant Local inventory in each market depending on the government restrictions
currently in place and continuing to leverage our Goods category in the
near-term. We also must continue to focus on expanding inventory through our
three inventory products - Deals with fewer restrictions, Offers, and Market
Rate. On the customer experience side, we must continue to improve our websites
and mobile applications; launch innovative products that remove friction from
the customer journey and drive awareness to our supply; and grow our
high-quality, bookable inventory.
30
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Results of Operations
North America
Operating Metrics
North America segment gross billings, units, and TTM active customers for the
three months ended March 31, 2021 and 2020 were as follows (in thousands):
Three Months Ended March 31,
2021 2020 % Change
Gross billings
Service gross billings:
Local $ 281,296 $ 392,609 (28.4) %
Goods 69,142 18,119 281.6
Travel 31,460 33,660 (6.5)
Total service gross billings 381,898 444,388 (14.1)
Product gross billings - Goods 626 82,275 (99.2)
Total gross billings $ 382,524 $ 526,663 (27.4)
Units
Local 8,266 14,132 (41.5) %
Goods 3,081 3,742 (17.7)
Travel 193 312 (38.1)
Total units 11,540 18,186 (36.5)
TTM Active customers 15,204 25,340 (40.0) %
Comparison of the Three Months Ended March 31, 2021 and 2020:
North America gross billings and units declined by $144.1 million and 6.6
million for the three months ended March 31, 2021 . TTM active customers declined
by 10.1 million for the three months ended March 31, 2021 . These declines were
primarily due to the significant decrease in consumer demand due to changes in
consumer behavior and actions taken by governments to control the spread of
COVID-19, including quarantines and travel restrictions, as well as business
restrictions and shutdowns. These declines were partially offset by a shift in
mix to higher-priced offerings.
North America units and gross billings declined in January and February 2021
compared with the prior year, and increased in March 2021 due to the timing of
the onset of the pandemic in March 2020 .
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Financial Metrics
North America segment revenue, cost of revenue and gross profit for the three
months ended March 31, 2021 and 2020 were as follows (dollars in thousands):
Three Months Ended March 31,
2021 2020 % Change
Revenue
Service revenue
Local $ 125,374 $ 142,660 (12.1) %
Goods 15,285 3,745 308.1
Travel 5,959 6,449 (7.6)
Total service revenue 146,618 152,854 (4.1)
Product revenue - Goods 626 82,275 (99.2)
Total revenue $ 147,244 $ 235,129 (37.4)
Cost of revenue
Service cost of revenue
Local $ 12,948 $ 18,801 (31.1) %
Goods 2,229 737 202.4
Travel 1,241 2,487 (50.1)
Total service cost of revenue 16,418 22,025 (25.5)
Product cost of revenue - Goods 458 69,333 (99.3) Total cost of revenue$ 16,876 $ 91,358 (81.5) Gross profit Service gross profit Local$ 112,426 $ 123,859 (9.2) % Goods 13,056 3,008 334.0 Travel 4,718 3,962 19.1 Total service gross profit 130,200 130,829 (0.5) Product gross profit - Goods 168 12,942 (98.7) Total gross profit$ 130,368 $ 143,771 (9.3) Service margin (1) 38.4 % 34.4 % % of Consolidated revenue 55.8 % 62.8 % % of Consolidated cost of revenue 17.4
52.8
% of Consolidated gross profit 78.1
71.4
(1) Represents the percentage of service gross billings that we retained after deducting the merchant's share from revenue. Comparison of the Three Months EndedMarch 31, 2021 and 2020:North America revenue and gross profit decreased by$87.9 million and$13.4 million for the three months endedMarch 31, 2021 . Those decreases were primarily driven by a decline in gross billings and transaction volume due to the impacts of COVID-19. Revenue also declined due to the transition of Goods to a third party marketplace model. In a third-party marketplace model, we generate service revenue which is presented on a net basis. Cost of revenue decreased by$74.5 million for the three months endedMarch 31, 2021 primarily due to the impacts of the transition of Goods to a third-party marketplace model. 32 -------------------------------------------------------------------------------- Marketing and Contribution Profit We define contribution profit as gross profit less marketing expense.North America contribution profit for the three months endedMarch 31, 2021 and 2020 was as follows (dollars in thousands): Three Months Ended March 31, 2021 2020 % Change Marketing$ 22,768 $ 39,409 (42.2) % % of Gross profit: 17.5 % 27.4 % Contribution profit$ 107,600 $ 104,362 3.1% Comparison of the Three Months EndedMarch 31, 2021 and 2020:North America marketing expense and marketing expense as a percentage of gross profit declined for the three months endedMarch 31, 2021 due to accelerated traffic declines, significantly shortened payback thresholds and lower investment in our offline marketing and brand spend in light of COVID-19. The increase in ourNorth America contribution profit for the three months endedMarch 31, 2021 was primarily attributable to a$16.6 million decrease in marketing, partially offset by a decrease in gross profit. International Operating Metrics International segment gross billings, units, and TTM active customers for the three months endedMarch 31, 2021 and 2020 were as follows (in thousands): Three Months Ended March 31, 2021 2020 % Change Gross billings Service gross billings: Local$ 69,674 $ 157,401 (55.7) % Goods 7,748 10,657 (27.3) Travel 3,459 26,831 (87.1) Total service gross billings 80,881
194,889 (58.5)
Product gross billings - Goods 90,567 84,847 6.7
Total gross billings $ 171,448 $ 279,736 (38.7)
Units
Local 2,091 6,844 (69.4) %
Goods 4,121 4,487 (8.2)
Travel 51 249 (79.5)
Total units 6,263 11,580 (45.9)
TTM Active customers 10,550 16,497 (36.0) %
Comparison of the Three Months Ended March 31, 2021 and 2020:
International gross billings and units decreased by $108.3 million and 5.3
million for the three months ended March 31, 2021 . TTM active customers declined
by 5.9 million for the three months ended March 31, 2021 . These declines were
primarily due to the significant decrease in consumer demand due to changes in
consumer behavior and actions taken by governments to control the spread of
COVID-19, including quarantines and travel restrictions, as well as business
restrictions and shutdowns. The decline in gross billings was partially offset
by a $15.1 million favorable impact from year-over-year changes in foreign
currency exchange rates.
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Financial Metrics
International segment revenue, cost of revenue and gross profit for the three
months ended March 31, 2021 and 2020 were as follows (dollars in thousands):
Three Months Ended March 31,
2021 2020 % Change
Revenue
Service revenue:
Local $ 23,189 $ 48,668 (52.4) %
Goods 1,970 2,233 (11.8)
Travel 847 3,273 (74.1)
Total service revenue 26,006 54,174 (52.0)
Product revenue - Goods 90,567 84,847 6.7
Total revenue $ 116,573 $ 139,021 (16.1)
Cost of revenue
Service cost of revenue:
Local $ 1,762 $ 4,144 (57.5) %
Goods 111 217 (48.8)
Travel 134 529 (74.7)
Total service revenue 2,007 4,890 (59.0)
Product cost of revenue - Goods 77,951 76,655 1.7
Total cost of revenue $ 79,958 $ 81,545 (1.9)
Gross profit
Service gross profit:
Local $ 21,427 $ 44,524 (51.9) %
Goods 1,859 2,016 (7.8)
Travel 713 2,744 (74.0)
Total service gross profit 23,999 49,284 (51.3)
Product gross profit - Goods 12,616 8,192 54.0
Total gross profit $ 36,615 $ 57,476 (36.3)
Service margin (1) 32.2 % 27.8 %
% of Consolidated revenue 44.2 % 37.2 %
% of Consolidated cost of revenue 82.6 47.2
% of Consolidated gross profit 21.9
28.6
(1) Represents the percentage of service gross billings that we retained after deducting the merchant's share from revenue. Comparison of the Three Months EndedMarch 31, 2021 and 2020 International revenue and gross profit decreased by$22.4 million and$20.9 million for the three months endedMarch 31, 2021 . Those decreases were primarily driven by a decline in gross billings due to the impacts of COVID-19 as discussed above. The decreases in revenue and gross profit were partially offset by favorable impacts of$10.0 million and$3.2 million from year-over-year changes in foreign currency exchange rates. Cost of revenue decreased by$1.6 million for the three months endedMarch 31, 2021 primarily due to the decrease in transaction volume and gross billings, partially offset by a$6.8 million unfavorable impact from year-over-year changes in foreign currency exchange rates. 34 -------------------------------------------------------------------------------- Marketing and Contribution Profit International marketing and contribution profit for the three months endedMarch 31, 2021 and 2020 was as follows (dollars in thousands): Three Months Ended March 31, 2021 2020 % Change Marketing$ 10,898 $ 20,721 (47.4) % % of Gross profit: 29.8 % 36.1 % Contribution profit$ 25,717 $ 36,755 (30.0) % Comparison of the Three Months EndedMarch 31, 2021 and 2020: International marketing expense and marketing expense as a percentage of gross profit declined for the three months endedMarch 31, 2021 due to accelerated traffic declines, significantly shortened payback thresholds and lower investment in our offline marketing and brand spend in light of COVID-19. The decrease in International contribution profit for the three months endedMarch 31, 2021 was primarily attributable to a$20.9 million decrease in gross profit, partially offset by a$9.8 million decrease in marketing expense. Operating Expenses Operating expenses for the three months endedMarch 31, 2021 and 2020 were as follows (dollars in thousands): Three Months Ended March 31, 2021 2020 % Change Marketing$ 33,666 $ 60,130 (44.0) % Selling, general and administrative 127,143 207,135 (38.6) Goodwill impairment - 109,486 (100.0) Long-lived asset impairment - 22,351 (100.0) Restructuring and related charges 7,422 6 NM Total Operating expenses$ 168,231 $ 399,108 (57.8) % of Gross profit: Marketing 20.2 % 29.9 % Selling, general and administrative 76.1 % 102.9 % 35
-------------------------------------------------------------------------------- Comparison of the Three Months EndedMarch 31, 2021 and 2020: Marketing expense and marketing expense as a percentage of gross profit declined for the three months endedMarch 31, 2021 due to accelerated traffic declines, significantly shortened payback thresholds and lower investment in our offline marketing and brand spend in light of COVID-19, partially offset by a$0.9 million unfavorable impact from year-over-year change in foreign currency exchange rates. SG&A decreased for the three months endedMarch 31, 2021 primarily due to lower payroll-related expenses due to restructuring actions and lower consulting and facilities-related expenses, partially offset by a$4.4 million unfavorable impact from year-over-year changes in foreign currency exchange rates. SG&A as a percentage of gross profit decreased for the three months endedMarch 31, 2021 due to the decline in fixed costs as a result of our restructuring actions. During the first quarter 2020, we performed an interim quantitative assessment of goodwill and long-lived assets as a result of significant deterioration in our financial performance due to the impact of COVID-19. As a result, we recognized goodwill impairment of$109.5 million , that represented the excess of the EMEA reporting unit's carrying value over its fair value, and long-lived asset impairment of$22.4 million for the three months endedMarch 31, 2020 . See Note 2,Goodwill and Long-Lived Assets, for additional information. Restructuring and related charges for the three months endedMarch 31, 2021 primarily represent severance and benefit costs for workforce reductions See Note 9, Restructuring and Related Charges, for additional information. Other Income (Expense), Net Other income (expense), net includes interest income, interest expense, gains and losses on fair value option investments, impairments of investments and foreign currency gains and losses, primarily resulting from intercompany balances with our subsidiaries that are denominated in foreign currencies. Other income (expense), net for the three months endedMarch 31, 2021 and 2020 was as follows (dollars in thousands): Three Months Ended March 31, 2021 2020 Interest income$ 1,155 $ 2,556 Interest expense (5,116) (6,958) Foreign currency gains (losses), net 22,084 (6,496) Impairment and other changes in fair value of investments - (8,089) Other income (expense), net $
18,123
Comparison of the Three Months EndedMarch 31, 2021 and 2020: The change in Other income (expense), net for the three months endedMarch 31, 2021 as compared with the prior year period is primarily related to a change in foreign currency gains and losses of$28.6 million due to a$32.2 million cumulative foreign currency translation adjustment gain that was reclassified into earnings as a result of the substantial liquidation of our subsidiary inJapan as part of our restructuring actions, as well as a$8.1 million impairment and other changes in fair value of investments. Provision (Benefit) for Income Taxes Provision (benefit) for income taxes for the three months endedMarch 31, 2021 and 2020 was as follows (dollars in thousands): Three Months EndedMarch 31, 2021
2020 % Change
Provision (benefit) for income taxes$ 2,427 $ (5,988) (140.5) % Effective tax rate 14.4 % 2.8 % 36
-------------------------------------------------------------------------------- Comparison of the Three Months EndedMarch 31, 2021 and 2020: The effective tax rate for the three months endedMarch 31, 2021 was lower than theU.S. statutory federal income tax rate due to the benefit of non-taxable items and theU.S. research and development tax credit. The three months endedMarch 31, 2021 and 2020 were also impacted by the pretax losses incurred in jurisdictions that have valuation allowances against their net deferred tax assets. The three months endedMarch 31, 2020 was impacted by the reversals of reserves for uncertain tax positions due to the closure of tax audits and by the carryback of federal net operating losses due to the income tax relief provided by the CARES Act. We expect that our consolidated effective tax rate in future periods will continue to differ significantly from theU.S. federal income tax rate as a result of our tax obligations in jurisdictions with profits and valuation allowances in jurisdictions with losses. See Note 10, Income Taxes, for additional information relating to tax audits and assessments and regulatory and legal developments that may impact our business and results of operations in the future. 37 -------------------------------------------------------------------------------- Non-GAAP Financial Measures In addition to financial results reported in accordance withU.S. GAAP, we have provided the following non-GAAP financial measures: Adjusted EBITDA, free cash flow and foreign currency exchange rate neutral operating results. Those non-GAAP financial measures, which are presented on a continuing operations basis, are intended to aid investors in better understanding our current financial performance and prospects for the future as seen through the eyes of management. We believe that those non-GAAP financial measures facilitate comparisons with our historical results and with the results of peer companies who present similar measures (although other companies may define non-GAAP measures differently than we define them, even when similar terms are used to identify such measures). However, those non-GAAP financial measures are not intended to be a substitute for those reported in accordance withU.S. GAAP. Adjusted EBITDA. Adjusted EBITDA is a non-GAAP performance measure that we define as net income (loss) from continuing operations excluding income taxes, interest and other non-operating items, depreciation and amortization, stock-based compensation, acquisition-related expense (benefit), net and other special charges and credits, including items that are unusual in nature or infrequently occurring. Our definition of Adjusted EBITDA may differ from similar measures used by other companies, even when similar terms are used to identify such measures. Adjusted EBITDA is a key measure used by our management and Board of Directors to evaluate operating performance, generate future operating plans and make strategic decisions for the allocation of capital. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. However, Adjusted EBITDA is not intended to be a substitute for income (loss) from continuing operations. We exclude stock-based compensation expense and depreciation and amortization because they are primarily non-cash in nature and we believe that non-GAAP financial measures excluding those items provide meaningful supplemental information about our operating performance and liquidity. Acquisition-related expense (benefit), net is comprised of the change in the fair value of contingent consideration arrangements and external transaction costs related to business combinations, primarily consisting of legal and advisory fees. The composition of our contingent consideration arrangements and the impact of those arrangements on our operating results vary over time based on a number of factors, including the terms of our business combinations and the timing of those transactions. For the three months endedMarch 31, 2021 , special charges and credits included charges related to our restructuring plan. For the three months endedMarch 31, 2020 , special charges and credits included goodwill and long-lived asset impairments and strategic advisor costs. We exclude special charges and credits from Adjusted EBITDA because we believe that excluding those items provides meaningful supplemental information about our core operating performance and facilitates comparisons with our historical results. 38 -------------------------------------------------------------------------------- The following is a reconciliation of Adjusted EBITDA to the most comparableU.S. GAAP financial measure, Income (loss) from continuing operations, for the three months endedMarch 31, 2021 and 2020 (in thousands): Three Months Ended
2021 2020
Income (loss) from continuing operations$ 14,448
Adjustments:
Stock-based compensation 7,179
14,015
Depreciation and amortization 17,019
25,909
Acquisition-related expense (benefit), net -
4
Restructuring and related charges 7,422
6
Goodwill impairment -
109,486
Long-lived asset impairment -
22,351
Strategic advisor costs -
3,626
Other (income) expense, net (1) (18,123)
18,987
Provision (benefit) for income taxes 2,427 (5,988) Total adjustments 15,924 188,396 Adjusted EBITDA$ 30,372 $ (22,464) (1)Other (income) expense, net for the three months endedMarch 31, 2021 includes a$32.2 million cumulative foreign currency translation adjustment gain that was reclassified into earnings as a result of the substantial liquidation of our subsidiary inJapan as part of our restructuring actions. Refer to Note 9, Restructuring and Related Charges, for additional information. Free cash flow. Free cash flow is a non-GAAP liquidity measure that comprises net cash provided by operating activities from continuing operations less purchases of property and equipment and capitalized software. We use free cash flow to conduct and evaluate our business because, although it is similar to cash flow from continuing operations, we believe that it typically represents a more useful measure of cash flows because purchases of fixed assets, software developed for internal use and website development costs are necessary components of our ongoing operations. Free cash flow is not intended to represent the total increase or decrease in our cash balance for the applicable period. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. For example, free cash flow does not include cash payments for business acquisitions. In addition, free cash flow reflects the impact of the timing difference between when we are paid by customers and when we pay merchants and suppliers. Therefore, we believe it is important to view free cash flow as a complement to our condensed consolidated statements of cash flows. For a reconciliation of free cash flow to the most comparableU.S. GAAP financial measure, see Liquidity and Capital Resources below. Foreign currency exchange rate neutral operating results. Foreign currency exchange rate neutral operating results show current period operating results as if foreign currency exchange rates had remained the same as those in effect in the prior year period. Those measures are intended to facilitate comparisons to our historical performance. 39 --------------------------------------------------------------------------------
The following table represents the effect on our condensed consolidated
statements of operations from changes in exchange rates versus the
Three Months Ended March 31, 2021
At Avg. Q1 2020 Exchange Rate
Rates (1) Effect (2) As Reported
Gross billings $ 538,882 $ 15,090 $ 553,972
Revenue 253,798 10,019 263,817
Cost of revenue 89,994 6,840 96,834
Gross profit 163,804 3,179 166,983
Marketing 32,790 876 33,666
Selling, general and administrative 122,773 4,370 127,143
Restructuring and related charges 6,897 525 7,422
Income (loss) from operations 1,344 (2,592) (1,248)
(1) Represents the financial statement balances that would have resulted had
exchange rates in the reporting period been the same as those in effect in the
prior year period.
(2) Represents the increase or decrease in the reported amount resulting from
changes in exchange rates from those in effect in the prior year period.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows from operations and cash
balances, which primarily consist of bank deposits and government money market
funds. As of March 31, 2021 , cash balances, including outstanding borrowings
under the Amended Credit Agreement, were $676.8 million . We also have $169.8
million in restricted cash as of March 31, 2021 (which is a portion of the net
proceeds from the 2026 Notes offering) that will be used to repurchase the
Atairos Notes in May 2021 .
Our net cash flows from operating, investing and financing activities from
continuing operations for the three months ended March 31, 2021 and 2020 were as
follows (in thousands):
Three Months Ended March 31,
2021 2020
Cash provided by (used in):
Operating activities $ (46,405) $(236,408)
Investing activities (12,744) 19,564
Financing activities 62,618 141,312
Our free cash flow for the three months ended
Three
Months Ended
2021 2020
Net cash provided by (used in) operating activities from continuing operations
$ (46,405) $ (236,408) Purchases of property and equipment and capitalized software (12,040) (10,596) Free cash flow$ (58,445) $ (247,004) Our revenue-generating transactions are primarily structured such that we collect cash up-front from customers and pay third-party merchants at a later date, either based upon the customer's redemption of the related voucher or fixed payment terms, which are generally biweekly throughout the term of the merchant's offering. Historically, we have primarily paid merchants on fixed payment terms inNorth America and upon voucher redemption internationally. In the third quarter 2020, we largely completed a transition to redemption payment terms inNorth America . 40 -------------------------------------------------------------------------------- Our cash balances fluctuate significantly throughout the year based on many variables, including gross billings growth rates, the timing of payments to merchants and suppliers, seasonality and the mix of transactions between Goods and Local. For the three months endedMarch 31, 2021 , our net cash used in operating activities from continuing operations was$46.4 million , as compared with$14.4 million net income from continuing operations. That difference is primarily due to a$53.1 million net decrease from changes in working capital and other assets and liabilities. The working capital impact was related to seasonal timing of payments to inventory suppliers and the impact of COVID-19. The difference between our net cash used in operating activities and our net income from continuing operations is also due to$7.7 million of non-cash items, including a$32.2 million foreign currency translation gain that was reclassified into earnings due to our substantial liquidation ofJapan , depreciation and amortization and stock-based compensation. For the three months endedMarch 31, 2020 , our net cash used in operating activities from continuing operations was$236.4 million , as compared with a$210.9 million net loss from continuing operations. That difference is primarily due to a$208.9 million net decrease from changes in working capital and other assets and liabilities. The working capital impact was related to the seasonal timing of payments to inventory suppliers and the impact of COVID-19. The difference between our net cash used in operating activities and our net loss from continuing operations due to changes in working capital was partially offset by$183.4 million of non-cash items, including$109.5 million of goodwill impairment,$22.4 million of long-lived asset impairments, depreciation and amortization and stock-based compensation. For the three months endedMarch 31, 2021 , our net cash used in investing activities from continuing operations was$12.7 million , which included purchases of property and equipment and capitalized software of$12.0 million . For the three months endedMarch 31, 2020 , our net cash provided by investing activities from continuing operations was$19.6 million . Our net cash provided by investing activities from continuing operations included the proceeds from the sale of an investment of$31.6 million , which was partially offset by purchases of property and equipment and capitalized software of$10.6 million . For the three months endedMarch 31, 2021 , our net cash provided by financing activities was$62.6 million . Our net cash provided by financing activities included$200.0 million of proceeds received from the issuance of the 2026 Notes, partially offset by$6.6 million in cash paid for issuance costs for the 2026 Notes and the revolving credit agreement,$23.8 million related to the purchase of capped call transactions, and$100.0 million in payments under our revolving credit agreement. As noted above, we have classified$169.8 million of the proceeds of the 2026 Notes that will be used to repurchase the Atairos Notes in restricted cash. For the three months endedMarch 31, 2020 , our net cash provided by financing activities was$141.3 million . Our net cash provided by financing activities included$150.0 million of borrowings under our revolving credit facility, partially offset by$3.8 million of distributions to noncontrolling interest holders and$3.3 million in taxes paid related to net share settlements of stock-based compensation awards. InJuly 2020 , we entered into the First Amendment of our Credit Agreement in order to, among other things, provide us operational flexibility and covenant relief in light of the ongoing impacts of COVID-19 on our business. InMarch 2021 , we entered into the Second Amendment to, among other things, extend the covenant relief through the fourth quarter 2021. In March andApril 2021 , we also issued the 2026 Notes and used a portion of the net proceeds from the 2026 Notes offering to purchase the capped call transactions. We intend to use the remaining net proceeds, together with cash on hand, to repurchase the Atairos Notes inMay 2021 . See Note 5, Financing Arrangements, for additional information. We believe that our cash balances, excluding borrowings under the Amended Credit Agreement, and cash generated from operations will be sufficient to meet our working capital requirements and capital expenditures for at least the next 12 months. We plan to continue to actively manage and optimize our cash balances and liquidity, working capital and operating expenses, although there can be no assurances that we will be able to do so. 41 -------------------------------------------------------------------------------- As ofMarch 31, 2021 , we had$176.8 million in cash held by our international subsidiaries, which is primarily denominated in Euros, British Pounds Sterling, Canadian dollars, and, to a lesser extent, Australian dollars. In general, it is our practice and intention to re-invest the earnings of our non-U.S. subsidiaries in those operations. We have not, nor do we anticipate the need to, repatriate funds tothe United States to satisfy domestic liquidity needs arising in the ordinary course of business. InMay 2018 , the Board authorized us to repurchase up to$300.0 million of our common stock under our share repurchase program. As ofMarch 31, 2021 , up to$245.0 million of common stock remained available for purchase under our program. The timing and amount of share repurchases, if any, will be determined based on market conditions, limitations under the Amended Credit Agreement, share price, available cash and other factors, and the share repurchase program may be terminated at any time. Repurchases will be made in compliance withSEC rules and other legal requirements and may be made, in part, under a Rule 10b5-1 plan, which permits share repurchases when we might otherwise be precluded from doing so. 42 -------------------------------------------------------------------------------- Contractual Obligations and Commitments Our contractual obligations and commitments as ofMarch 31, 2021 did not materially change from the amounts set forth in our 2020 Annual Report on Form 10-K, except as disclosed in Note 6, Commitments and Contingencies. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as ofMarch 31, 2021 . Critical Accounting Policies and Estimates The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenue and expenses, and related disclosure of contingent liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. Our significant accounting policies are discussed in Item 2, Note 2, Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . In addition, refer to the critical accounting policies and estimates under Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 43 -------------------------------------------------------------------------------- Recently Issued Accounting Standards InOctober 2020 , the FASB issued ASU 2020-10, Codification Improvements. This ASU amends a variety of Topics, including presentation and disclosures of financial statements, interim reporting, accounting changes and error corrections. This ASU will be effective for annual reporting periods beginning afterDecember 15, 2021 and interim periods within those annual periods beginning afterDecember 15, 2022 and early adoption is permitted. We are still assessing the impact of ASU 2020-10 on our condensed consolidated financial statements. There are no other accounting standards that have been issued but not yet adopted that are expected to have a material impact on our condensed consolidated financial statements. 44
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