Things look up for Groupon

Groupon Inc’s quarterly revenue rose a faster-than-expected 7.5 percent after the company’s North American daily deals business turned in a strong performance, stirring hopes that the struggling company may have begun to turn things around.

Shares in the company, one of the most feted Internet market debutantes of 2011 before daily deals mania cooled, climbed almost 10 percent in after-hours trade. They have gained about 40 percent since the February ouster of co-founder and former CEO Andrew Mason, who was criticized for lacking the experience to run an increasingly global, public company.

Wall Street was cautious ahead of Groupon’s results, so the company’s “solid” performance triggered a particularly big gain in Groupon shares on Wednesday, analysts say.

“Margins came in better and they are re-affirming their full-year income guidance. It could have been worse,” said Ken Sena, an analyst at Evercore Partners.

Groupon has been trying to revive a sluggish European business, while juggling the fast-rising cost of ensnaring new customers, and merchants to partner on Internet coupons for everything from spa treatments to fine dining.

The Chicago-based company finally fired Mason in February after a string of disappointing results wiped out three-quarters of its market value since its 2011 IPO.

On Wednesday, it reported first-quarter revenue rose to $601.4 million from $559.3 million a year earlier, surpassing the $590 million analysts had expected, according to Thomson Reuters I/B/E/S.

Consolidated segment operating income, or CSOI, a closely watched measure of Groupon’s profitability, came in at $51.2 million in the latest period. Mark Mahaney, an analyst at RBC Capital Markets, was expecting CSOI of $26 million.

Its North American revenue rose 42 percent, while international revenue fell 18 percent.

Groupon, which has lost several other key executives, is on the lookout for a new permanent chief executive. Interim co-CEOs Eric Lefkofsky and Ted Leonsis continue to grapple with its struggling European business, while expanding in the United States.

Lefkofsky, who co-founded Groupon with Mason and is chairman, led the earnings conference call with analysts for the first time, acknowledging missteps and announcing a “new chapter” focused on the company’s local commerce roots.

Analysts expect a slimmed-down company under new leadership.

“At times as an organization we spread ourselves too thin and fail to focus on the things that will have the greatest impact,” Lefkofsky said.

Local marketplace focus

Groupon has been building an online deal marketplace called Pull that lets people search for and buy deals in their area. This is a big change from Groupon’s original business, which sent a daily email to subscribers offering one or two deals.

Emails accounted for less than 45 percent of North American transactions in the first quarter, suggesting the Pull marketplace is gaining momentum. A Groupon spokesman declined to say how many transactions came from online searches.

Lefkofsky said the marketplace approach has potential because more people are carrying smartphones and can search for what they want to do and buy locally as they move around.

About 45 percent of North American transactions came from mobile devices in March, up from about 20 percent two years ago, Lefkofsky noted.

That Pull marketplace however needs a lot of merchants to offer deals for longer periods, something Lefkofsky said the company was making progress on.

At the end of March, Groupon was offering almost 40,000 active deals from merchants in North America, up from about 1,000 when the company went public in late 2011.

Lefkofsky said that over half of Groupon’s local transactions in North America came from this “deal bank” of longer-term merchant offers. In March more than 60 percent of the contracts Groupon signed with merchants were for longer-term deals, he said.

For now, Groupon’s board of directors has formed a special committee that has begun a search for a new chief executive for the company, interim co-CEO Ted Leonsis said on Wednesday.

RBC’s Mahaney said Lefkofsky did a “nice job” on the conference call and asked if he was interested in the full-time CEO role. The co-founder did not respond, asking Ted Leonsis, Groupon’s other interim CEO, to chime in.

The current leadership team is “gelling very very nicely,” giving the search committee more time to find “the ideal long-term CEO,” Leonsis added.

Groupon spokesman Paul Taaffe said Lefkofsky has not put himself forward as a candidate and is not being considered by the committee for the role.

Leonsis is leading the search committee, which Lefkofsky will not be on. Groupon’s Taaffe declined to say who else is part of the group.

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Things look up for Groupon