Can Groupon handle margin compression?

Read here:

In his Twitter photo, Groupon CEO Andrew Mason is on the floor, in pajamas, looking like a giddy five-year-old on Christmas. Yet his accomplishments are anything but juvenile. He has built a 10,000-person organization operating in 45 countries that is expected to have 2011 revenue of roughly $1.6 billion. And he has done it all since October 2008.

For the fourth quarter, to be reported on Wednesday, analysts expect sales of $473 million, up nearly threefold from a year ago. Still, as Mr. Mason leads his first earnings call, the hard work may just be starting for the newly public company. Groupon has to prove its business isn’t just a fad and, as important, that it can make money. Otherwise, its $15 billion market value makes little sense.

Slowing revenue growth is a potential concern. Groupon chopped marketing costs in the third quarter. While that got the company closer to profitability, it may have been a reason sales growth versus the prior quarter slowed to 10%. Analysts expect Groupon maintained that pace in the fourth quarter. A related worry is churn. Groupon doesn’t disclose how frequently users are clicking “unsubscribe” on its emails. As users drop off, it gets harder to replace them with new subscribers, especially given how large Groupon has already become. Groupon has done well to launch new products to existing subscribers. In addition to the core business of spa and restaurant coupons, product and travel deals appear to be growing nicely. But the share of revenue Groupon gets to keep—its “take rate”—is lower than with the core business. Another new product—instant deals delivered to users based on their location—is one Groupon has touted as distinguishing it from smaller rivals. But it isn’t clear instant deals are catching on.

Rival LivingSocial may be pressuring margins. The private company’s 2011 financial results were outed in the annual financial filing of an investor, Amazon.com, showing $245 million in revenue. A person familiar with the matter says LivingSocial did about $750 million in gross billings. That translates to a 33% take-rate, undercutting the 37% Groupon reported last quarter, itself down from 44% at beginning of the year. Add it up, and Mr. Mason still has to convince investors Groupon can handle any growing pains.