In Groupon’s first earnings filing since the firing of founder Andrew Mason, the company reported mixed results as revenues beat expectations but margins slid for the second consecutive quarter. In a positive sign for the company, gross billings in its higher-margin local business grew to $824 million from a low of $677 million in Q3 2012, marking the first time local’s share of gross billings has grown since the company introduced its Goods business in late 2011.
Eric Lefkofsky, who is serving as co-interim chief executive with Ted Leonsis, opened the earnings call Wednesday evening with an apology to investors, admitting that the company had “spread [itself] too thin and failed to focus on things that will have the greatest impact.” Part of that extension, Lefkofsky admitted, was overinvesting in a secondary businesses like Groupon Goods at the cost of its more profitable local segment.
“We are a local company,” Lefkofsky affirmed. “Everything we do has local in mind.”
The company’s local business improved in almost every metric: gross billings, profit, and revenue each grew from the previous quarter. The take rate for the local segment — the percentage of a deal that the Groupon keeps — inched up from 36% in Q4 2012 to 40% in Q1 2013, after sliding for four consecutive quarters. The company’s local business even grew internationally, where revenues had dropped by a third over the previous year.
Meanwhile, the company’s Goods business continues to struggle. The gross profit margin for Groupon Goods in North America shrunk to 7.6%, declining 20% quarter-over-quarter and nearly 70% from a year earlier. CFO Jason Child attributed the disappearing margins in the Goods business to the company’s poor logistics and fulfillment infrastructure, which accounts for a “substantially” larger cut of revenue than most e-commerce business.
In many ways, it’s a tale of two businesses with Groupon. The Goods business has shown little-to-no operating leverage with cost of revenue as a percentage of revenue increasing to 91% in Q1 from 30% a year earlier, as the local segment starts to scale.
The question for Groupon is whether it can develop lasting synergies between the two businesses beyond its email distribution list, which now accounts for less than half of its total transactions. During the call, Lefkofsky hinted at a ways for Goods to build on its local infrastructure, pointing to potential programs bridging goods with local inventory search or fulfillment from local stores.
With 45% of its North American transactions coming on mobile in Q1, Groupon is also working to shift away from its one-off email distribution model to an on-demand approach where users can actively search for deals. Over the past few quarters, the company has built out its “deal bank” by convincing merchants to leave deals open for a year rather than a day. It’s a critical initiative for the company, both in adapting to a quicker purchase cycle on mobile and opening up a more lasting relationship with merchants on top of which it can add incremental services.
Steven Jacobs is deputy editor at Street Fight.