The weak European economy contributed to lowersales growth than expected at Groupon Inc., and analysts expressed concern thatthe company is increasing revenue through the less-profitable business ofactually selling items, rather than just directing customers to great deals.
Although the online deals site beat Wall Street's profit estimates in thelatest quarter, its stock fell sharply because of the dual concerns aboutgrowth.
Shares fell $1.47, or 19.5 percent, to $6.08 in after-hours trading aftersecond-quarter results were announced Monday. That's down 70 percent from itsinitial public offering price of $20 per share in November.
Groupon gets more than half of its revenue from outside of North America, andmost of that comes from Europe, where economic worries are affecting sales. CEOAndrew Mason told analysts Monday that deals for discretionary items such aslaser hair removal and luxury hotel stays were suffering.
"These more discretionary offers are more susceptible ... as macroeconomicconditions have deteriorated," he said.
A weaker euro and British pound also translated into fewer U.S. dollars in thequarter.
Groupon plans to address those issues by adding personalized deals in Europe,giving better tools to businesses that advertise with Groupon and changing themix of promotions to offer customers lower-priced deals.
The company also said that much of its growth in North America came from a newsegment called Groupon Goods. Instead of offering discounts on restaurant mealsand weekend getaways, the company now sells items like earrings and yogurtmakers that it buys from manufacturers.
It accounts for revenue from such goods differently, too, booking the revenuefor the entire price of the item, not just what it collects from vendors, whichis how it books revenue from its core coupon business.
Although revenue grew 45 percent in the three months to June 30 to $568.3million, the company said if it had accounted for goods sales the way it hasdone for deals revenue, growth would have been just 30 percent. Analysts werelooking for revenue growth of 46 percent.
That sparked worries about less-profitable growth and slower gains at its corebusiness.
"I think it's a less profitable business," said Herman Leung, ananalyst with Susquehanna Financial Group. He said the growth of direct saleshad the potential of "masking growth" in the deals business.
Founded in November 2008, Groupon pioneered the online daily deals market,which offers subscribers deep discounts on everything from spa sessions totequila tastings if enough people buy in. It sparked many copycats, includingLivingSocial and Google Offers.
Groupon's net income in the three months to June 30 came to $28.4 million, or 4cents per share, reversing a net loss of $107.4 million a year ago.
Excluding the cost of paying executives with stock, a gain on reorganizing aChinese joint venture and other items, adjusted earnings came to 4 cents pershare, beating the 3 cents expected by analysts polled by FactSet.
Groupon, which is based in Chicago, said it improved profitability by reducingthe cost of acquiring customers by 43 percent, while increasing the number ofactive customers by 65 percent from a year ago to 38 million.
"We just got more efficient on marketing," Chief Financial OfficerJason Child said in an interview. "We dropped those efficiencies to thebottom line."
Although investors have been spooked in the past by how much Groupon spends toacquire new customers, its growth prospects took prominence this time.
Revenue rose 45 percent to $568.3 million, which was below the $574.8 millionexpected by analysts. Groupon says its revenue was $32.4 million lower becauseof unfavorable currency-exchange rates.
For the quarter through September, Groupon said it forecast revenue of $580million to $620 million. The midpoint was below the $605.5 million expected byanalysts.