Q4 2019 Earnings Call
[music].
Everyone and welcome to coupon fourth quarter 2019 financial results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the company's formal remarks to ask a question has to Starkey followed by the number one on your Touchtone phone once again, that's star one to ask a question.
Today's conference call is being recorded for opening remarks, I would like to turn the call over to the Vice President of Investor Relations cerebral Supernus. Please go ahead.
Good morning, and welcome to Groupons fourth quarter 2019 financial results Conference call.
On the call today, our CEO Rich Williams and CFO Melissa Thomas.
The following discussion responses to your questions reflect management's views as of today February 19th 2020, only and will include forward looking statements.
Actual results may differ materially from those expressed or implied in our forward looking statement.
Additional information about risks and other factors that could potentially impact or financial results is included in our earnings press release and in our filings with the FCC, including or annual report on form 10-K.
We encourage investors to use our investor Relations web site at Investor Day, Groupon Dot com as a way of easily finding information about the company.
Coupon, possibly makes available on this web site. The reports that the company files or furnishes with the FCC.
Corporate governance and for me, our quarterly stockholder letter and select press releases and social media posting.
On the call today, we will also discuss the fallen non-GAAP financial measures adjusted EBITDA adjusted EBITDA margin free cash flow and FX neutral results in our press release enter filings with the FCC each of which is posted on our Investor Relations website, you will find additional disclosures regarding the non-GAAP measures.
Putting reconciliations of these measures to the most comparable measures under U.S. gap.
All references to actually in a in 2018 exclude the charges for the IB M. patent litigation.
As we discuss our results during this call note that all comparisons unless otherwise stated refer to year over year growth as reported.
Our gross profit comparisons our FX neutral, including gross profit per customer <unk>.
And with that I'm happy to turn the call over to rich.
Thanks, Jennifer and thanks to all of you for taking the time to join US today. In addition to this call. We've also issued or fourth quarter release in quarterly letter to stockholders I hope to take the time to read them, both and review our slide deck as they all go into significant detail about our result in strategy for 2020 and beyond.
Our fourth quarter performance was disappointing by nearly every measure it failure to meet the financial expectations, we set more understandably frustrate our shareholders as it has us.
This performance shortfall, coupled with the significant headwinds we faced call for profound change and we're taking immediate and decisive action to return the company to growth.
We worked with our board an external advisers to develop a strategy and execution plan to unlock the potential into platform and assets. We've built over the last 10 years.
We believe that our plan can return groupon to high single digits billing growth by 2022, while expanding adjusted EBITDA margins.
Our strategy is simple.
Turn groupon into the local experiences marketplace.
This means planning a quick exit from the goods category.
Dedicating resources to expand our local experiences marketplace and executing a new course of action focused on four core priorities.
First building high quality inventory density and core cities in bringing on merchants full catalogs.
Modernizing the mobile experience for customers and providing new tools to help merchant grow their businesses <unk>.
Relaunching, the Groupon brand and marketing strategy to move from deal centric to a local experiences marketplace.
And reducing our costs and rightsizing our spend to support our go forward business.
We will be laser focused on the biggest opportunity for groupon and where our true strength lies local experiences.
It's a trillion dollar opportunity.
$3.4 billion and billings related to this market in 2019, and we are clear leader in this space with significant scale. This is where we can grow this is where we have the right to win.
We're very excited about our go forward opportunity, but obviously, we have to acknowledge our fourth quarter and full year performance shortfalls.
Heading into the fourth quarter, we set expectations that we believed we could achieve based on our accelerated pace of product launches and other execution successes.
Our north American local business had momentum as we exited the third quarter and unit performance. It improved steadily each month of the quarter.
Midway through the fourth quarter. It became clear however that we were seeing far fewer customers engage with good and it impacted overall traffic to our site.
The lower traffic ultimately impeded performance in all of our categories. This was particularly notable in November and affected our holiday peak period when goods engagement has historically been a business driver.
Adding to these challenges certain conversion initiatives and selective not deliver on expectations.
Our traffic declines in these other factors, which Melissa will discuss in greater detail combined to create a headwind that we could not overcome during the fourth quarter.
Before I discuss our strategy, let's touch on goods.
Our management team and board had been evaluating the role of goods for some time, our fourth quarter performance and the challenges goods is pose over the past few years have clarified our path forward.
Delivering on our growth strategy requires total focus on capturing the local experiences opportunity.
Overtime goods has become a less meaningful driver of engagement and increasingly inefficient use of our impressions.
As effectively become a distraction in which we can no longer compete and that we cannot afford as it has taken roughly 40% of our impressions to deliver roughly 20% of our gross profit.
This is the crux of our plan to exit goods.
Groupon is the largest multicategory local commerce platform in our markets and we are well positioned to capitalize on the massive opportunity in local experiences.
In 2019, we were a market leader and trusted brand, but with less than 1% market share.
While the competitive landscape is fragmented others are mobilizing against this opportunity. So we need to act now to extend our lead.
To do this we have to move quickly against a singular mission winning in local experiences.
We intend to put our power behind our four priorities inventory modernization brand and cost structure in order to set the stage for Groupons returned to growth.
Let me share some additional context about each of these.
First on inventory.
We believe that increasing our inventory and more specifically elevating inventory quality and density and targeted core cities is mission critical.
When merchant density is higher we see an increase in purchase frequency as much as 15% to 20%.
We also know from our partnership work that our customers want a more comprehensive catalog of experiences overall.
We need to offer unbeatable selection and the most desired locations and this requires an incredibly targeted granular approach to matching supply and demand.
Connecting high quality merchants and experiences with high intent consumers at the neighborhood level.
To do this we intend to realign our sales teams to target cities and approach merchants with a new go to market strategy, that's focused on improving quality supply and specific neighborhoods and provides upfront competitive pricing.
We will or every merchant to give us their full catalog of experiences from market rate to slightly discounted to deeply discounted offers in order to strengthen our value proposition for consumers.
We expect this approach to allow us to better leverage are deeply experienced and skills local sales team and further empower our market leading salesforce efficiency.
We plan on Rolling this out in phases with Citi is coming online starting this quarter and building throughout the year by year end, we expect to have at least 10 major cities deployed.
In addition, we plan to accelerate our inventory expansion with partnerships that will begin to benefit from our first generation of open platform.
By the end of Q2.
We expect these partnerships to not only at inventory in our target cities, but also efficiently deliver inventory breadth to all groupon markets.
On modernization.
We need to deliver a beautiful mobile product that matches, what consumers want from groupon.
A personalized experience with curated local merchandising.
And for merchants, we need to offer new tools that will help them grow their businesses by attracting and retaining customers.
In the second quarter, we'll be launching a new app that will begin to bring this new experience to life for our customers. Throughout this year you can expect to see our consumer product roadmap prioritize bookability search discovery and Curations.
We also intend to lean further into cloud based machine learning capabilities to help us deliver on these goals faster.
We plan to complement these efforts with initiatives that expand our bookable inventory, we've already seen how bookability can drive the business as we scale booking in the international dining with 18% gains and purchase frequency for customers, who buy in book through Groupon.
We also need to begin prioritizing new merchant features as merchant satisfaction is critical in our two sided marketplace.
So this year our merchant product roadmap includes dedicated new tools with a focus on self service options that will help merchants joined the groupon marketplace more quickly with more pricing options and improved campaign reporting.
In addition, overtime, we expect to roll out even more ways for merchants to reach customers and promote on our platform.
The a new advertising options that can extend our platform and revenue streams.
All of these efforts are meant to build a foundation to enhance our long term partnerships with our merchants.
Building, a more modern marketplace should allow us to remove friction from the customer journey from discovery to purchase to redemption help our merchants grow their businesses and improve the overall health of our marketplace.
With respect to brand.
Groupon is already a beloved brand in a household name with well over 80% aided awareness in the United States.
Physician few brands ever achieve.
Our opportunity however, does not just being known.
It's being top of mind when our customers are looking for the best things to do in their backyards and beyond.
Building is top of mind awareness requires leveraging our equity in deals and advancing the brand position to reflect our focus on local experiences today, we are well known for value in discovery, we have an opportunity to illustrate the convenience and incredible breadth of the groupon table moments, we serve for most consumers we estimate that these moments happen.
80 or more times per year.
As we scale inventory in the right locations and modernize our products. We believe will be in a great position to relaunch our brand in the second half of 2020.
Across all customer touch points, we plan to lead with our experiences value proposition.
Supporting these efforts will be a full funnel marketing strategy, combining targeted hyper local marketing and new channel development, including social with broader brand advertising and efficient transactional advertising to build the brand drive consideration and efficiently reduce reliance on email.
With strong experienced driven brand positioning.
Market, leading product and inventory, we believe that groupon should be best positioned to become the defacto standard and local experiences.
Last on cost.
We believe we can further strengthen our culture of operational efficiency.
The planned exit of goods and the opportunity to rightsize the organization to align with the needs of our go forward business. We believe we can deliver leveraging our cost structure overtime as we grow the topline.
In closing.
I'm incredibly excited about the opportunity ahead of us and while I know we have a lot of work to do here is one of the data points that gives me confidence in our future.
In North America, we have approximately 8 million customers that we'd consider our best customers.
Our best customers in North America of household income of 75 to $100000.
Live in a city and they love new experiences.
They've told us that they like to keep busy and when they're looking for something to do they want to do it in their own neighborhood and in the near future.
In 2019.
They purchased approximately 58% of our total unit spent about $2.1 billion with us and purchased about seven times on average.
Just one more purchase from these best customers represents a 300 million dollar opportunity in net operating bookings.
Given the profile of this customer driving their purchase frequency up by just one time per year is not hard to imagine.
We also have 18 million active customers, who look similar and one more purchase from them is worth another approximately $450 million in other words, we have valuable customers. They are loyal and engaged and are not going away.
They've told us that they are looking for a go to destination for local experiences and that absolutely should be groupon.
Before I turn the call over.
I'd like to cover some other exciting news.
I'd like to officially welcome Valerie mostly in Hell invade we've been elected to our board of directors and Richard Mirage of mid capital, who has been appointed as a board advisor.
All three bring unique invaluable perspectives and will be great assets as we move through the transformation.
I'm also very happy that Melissa Thomas will become our permanent CFO Melissa has long been a key part of our senior team and I'm thrilled to have our take on this expanded role permanently.
With that Melissa will take you through the fourth quarter.
Thanks, Rich and thanks again, everyone joining us this morning.
You heard we know we must move quickly to return groupon to growth trajectory on both the top and bottom line.
We have a great opportunity to build a more valuable business.
Solely focusing our efforts on the one trillion dollar plus local experiences market.
At the same time any company facing transition most appropriately sized up and plan for challenges that are inherent to change.
And Groupon is no different.
Today.
I'll use my time to walk you through the drivers behind our Q4 performance.
Any insights on units and traffic trends.
Chuck through our operating goals for 2020, as well as our financial outlook for 2022.
After that we'll open the call for questions.
In the fourth quarter gross profit was 310 million and adjusted EBITDA was 84 million.
Our fourth quarter and full year performance, so far short of our expectations and we did not deliver on our goal of 270 million of adjusted EBITDA for 2019.
We are incredibly disappointed with these results.
As we entered the fourth quarter, we expect it to face ongoing traffic headwinds.
Customer losses in North America, and challenging macroeconomic conditions in Europe.
We also expected continued momentum in North America local.
That is contribution from conversion initiatives, including our recent guest check out and universal card product launches.
Net neutral gross profit impact from select and higher marketing leverage compared with Q3.
The fourth quarter was much more challenging than we predicted.
Traffic headwinds, particularly from organic channels, such as E mail became significantly worse than recent trend.
Competition and good growth to levels that left us unable to compete effectively.
And our conversion initiatives, including Universal card did not deliver the benefits we had expected.
To give you insight into the trajectory within the quarter.
First note that our plan, which considers historical buying patterns on our site called for a meaningful shift of impressions and other assets to the goods category throughout the quarter.
Midway through the quarter. However, it became clear that we were not competing well and goods and November performance with particularly poor.
The lack of engagement with our good offering impacted the overall traffic to our site and ultimately performance in all of our categories.
Well guess checkout delivered more conversion lift than we expected other conversion initiatives such as Universal card did not contribute as we expected.
The select program was expected to be net neutral to gross profit in the fourth quarter.
But the program underperformed due to higher than anticipated customer acquisition costs.
And a lower than expected number of enrollees converting to pay members.
The program also began over indexing towards our goods category in the second half of 2019.
Coupled with results in the fourth quarter led to our decision to discontinue new enrollment in our select program.
That said.
We've learned a lot and continue to believe a loyalty program will play a role in driving value for customers and merchants in the future.
Our millions of customers, who I will and engaged remain an important opportunity.
I encourage you to take a look at our slide that illustrates the potential impact of taking customers, who purchased two to three times per year.
Or about 30% of our customer base.
Up to four times per year.
Next I will touch on specific trends within North America and international gross profit performance.
As well as global marketing and SGN expenses.
In North America gross profit was 207 million down 40 million or 16% year over year.
Q4, North America local gross profit was 170 million.
Down 10 million.
6%.
And local units declined 11%.
Q4, North America. Good gross profit was 31 million down 25 million for 45% and goods units declined 32%.
North America net customers declined by 1.2 million in the fourth quarter and while we anticipated that our customer balance would continue to decline has it had during the first three quarters of 29 team.
Q4 customers came in much worse than expected.
Which was primarily driven by fewer goods customers.
Gross profit per customer on a trailing 12 month basis.
$30.48.
5% for year.
With the planned exit of goods, we expect some volatility in our active customer numbers and while we work through that our primary focus will be on driving unit velocity and purchase frequency.
Which we believe will be indicative of demand our platform.
In light of the unfolding North America performance late in the quarter, we made the decision to shift impressions to our local category.
And we were encouraged by the momentum we picked up heading into 2020, including a return to unit growth in North America local in January.
Well there is a lot of work ahead.
We see this as an early signs that our strategy to focus on local experiences its the right path forward.
Turning to international gross profit was 103 million down 14 million or 11%.
Q4 International local gross profit was 74 million downsize million or 6%, while local units grew 4%.
Local gross profit performance was impacted by a mix shift toward lower margin deals.
While we left bend the curve on gross profit growth. We are encouraged by our ability to drive local unit growth in international for three consecutive quarters.
Despite a very challenging macro environment.
As we drive towards a more personalized and curated experience on groupon supported by high quality local supply.
We believe we can do and even better job servicing the right experience to the right customer at the right time and accelerate and sustain marketplace velocity.
International goods gross profit was 20 million.
Around 7 million or 26%.
International gross profit per customer on a trailing 12 month basis was $22.11 down 5%.
Net customers declined 400000 in the quarter largely driven by declines in the UK as well as other countries experiencing tough macroeconomic conditions.
The UK continues to be a headwind to growth in international and 2019 was the worst year in retail in the UK in more than 20 years.
Well, our international performance was impacted by macro conditions.
We have work to do around local supply density and monetizing the marketplace.
North America's further along in developments in international, but the opportunities for improvement or similar.
Based on this.
Plan again economies of scale by applying our global strategy.
And we believe we can execute more efficiently than we had before by globalizing our efforts.
In the fourth quarter on a consolidated basis.
Marketing expense was 82 million or 26% of gross profit.
Last quarter, we said, we expect it to gain further leveraging marketing spend as a percent of gross profit, which we did but not to the level that we expected.
We see the relaunch of her brand and deploying full federal marketing strategy as a major opportunity for Groupon.
And over time, we would expect marketing leverage to improve as we align our spend with this opportunity.
As you know you for the fourth quarter was 188 million.
And improvement of 7 million or 4% year over year.
This decrease was primarily driven by lower performance based compensation, which was partially offset by higher stock based compensation.
Throughout 2018, we continued to do a solid job managing expenses.
And we believe we can accelerate our efforts based on our planned exit goods and rightsize, our organization to align with the needs of our core local and travel categories.
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Moving to free cash flow.
As a reminder, the fourth quarter is typically our highest quarter of free cash flow generation, given the seasonality of our business and the timing difference between cash collections from customers and settlements with merchants and suppliers.
With that as context, the steep decline of our goods category in the fourth quarter had a material impact on our supplier payable balance at year end.
We reduced our free cash flow by over 100 million for the year.
This combined with lower year over year adjusted EBITDA resulted in full year free cash flow a 4 million.
Natural decline from 2018.
We have a strong balance sheet and ended the year with 751 million of cash and currently have 400 million of capacity available on our Undrawn revolver.
Mr and provides us with important financial flexibility to support our growth strategy, which we believe will create value for our shareholders.
It's important to note that we expect to take a one time working capital step down in 2020 due to the planned exit of the goods category.
As we look ahead to 2020 and beyond.
Confident that our plan to exit goods in order to focus on our local experiences marketplace is the right thing to do.
We believe our strategy.
Clear execution path will unlock purchase frequency and grow the business.
That said.
We also know that the first year the transformation is the hardest to predict.
Particularly when there are challenges, they're not completely within our control.
We are committed to providing disclosures and guide posts that show, we're making progress against our top four priorities.
We also know that it's important to help our investors understand what these changes mean for our financial model.
To achieve this we're providing 2020 operating gold.
More detailed financial outlook for 2022.
And a target financial model.
We hope will give you a clear picture of the direction in which coupon is headed.
Starting with 2020.
There are three core challenges that we will need to address in 2020.
First as part of the plan to exit our goods category.
We will need to consult with various works councils in our international geography.
And while we have a plan that estimate timing and execution ultimate timing is dependent upon those consultations and negotiations.
In addition, we are still evaluating the accounting impact to our ongoing and discontinued operations.
Second we will be focused on minimizing the internal disruption caused by the planned goods exit and overall execution of our strategy.
And third we will be heavily focused on keeping our cross shopping customers engaged in the go forward coupon value proposition.
To provide context.
Our customer base, excluding goods only customers was 35 million at the end of 2019.
With approximately 7 million of these customers being goods cross shoppers.
As we navigate these challenges we will be heads down focused on executing against our core priorities.
In 2020, you can measure progress against our strategy as we had five key milestones.
Within inventory.
We intend to execute our density strategy and 10 cities.
Within modernization, our top milestones are launching our new mobile app in the second quarter and expanding Bookable offers throughout the year.
We believe their inventory and modernization work will allow us to grow North America units year over year in the second half of 2020.
In marketing as we've discussed we intend to relaunch our brand and to play a full final marketing strategy.
And finally with SGN, a our goal is to reset our cost base with the exit of goods.
Given our transformational plan to exit goods and the disruption. This exit may create we're not in a position to provide 2020 gross profit or adjusted EBITDA guidance.
We recognize however that you will need insights for building your models.
So I'd like to provide some context and the potential impact of our plan to exit goods.
In 2019, we estimate the marketing spend directly attributable to goods with 62 million.
And SGN ate spend directly attributable to goods with over 75 million.
Both of these numbers exclude stock based compensation and depreciation and amortization.
The goal of approximating these direct goods cost is to help you size the cost structure of the goods category and its impact to adjusted EBITDA in 2019.
Based on our plan to exit the goods category.
We anticipate that its financial results ultimately will be presented as a discontinued operation.
However, these metrics are not intended to estimate discontinued operations financial information, nor do they take into account any indirect cost.
The plan to exit of goods unlocks our ability to reset our cost structure to align with our singular focus on the local experiences marketplace.
As a result, we're also taking a hard look at our cost structure more broadly.
And plan to aggressively take cost out of the organization over the next 12 to 18 months.
At a minimum we estimate we can take approximately 75 million.
She any cost out related to the plant goods exit.
We're also pursuing an additional 50 million or more of any savings.
It will take us sometime to work through these opportunities, but I can assure you that they are a key focus area for us.
That said due the timing of our planned exit of the goods business, we will not realize the full benefit from the removal of cost directly associated with goods until 2021.
In 2020, we expect to incur onetime costs to ensure we have the right execution capacity, including an external execution partner.
To successfully executed.
Capitalize on a local experiences marketplace opportunities and rightsize our cost structure.
In addition, we expect to incur restructuring costs in 2020.
Net net.
We expect about 80 million of impact on adjusted EBITDA in 2020.
From the goods exit and related disruption as well as headwinds such as lower bonus funding in 2019, and the migration of our on premise datacenters to the cloud.
It is important to note to the timing of the plan goods exit could have a meaningful effect on the magnitude of this adjusted EBITDA impact in 2020.
One last item I'd like to address and a little more detailed in our plan to migrate to the cloud.
As I indicated we will experience some expense headwinds in 2020, as we ramp up our migration to the cloud.
We estimate that this initiative will take three to four years to complete and in total over that time period, we expect that our SGN expenses will increase by about 40 to 50 million.
We believe that by moving to the cloud will be able to enhance our overall site performance and help accelerate our machine learning capabilities.
As we exit 2020, we expect to be well positioned for growth.
There may be some timing noise over the next year created by the moving pieces I just outlined we're excited about the future.
In fact looking ahead to 2021, we expect to see some inflection in key metrics for local including units purchase frequency and revenue and to see the benefit of our cost actions.
Using 2021 is a building here by 2022, we believe we can achieve unit growth in the high single digits.
Billings growth in the high single digits.
Revenue growth in the mid single digits and an adjusted EBITDA margin in the high teens.
We have included these goals as well as a high level view of our target financial model in our slide deck for your reference.
In addition to these goals I want to point out the new data disclosures in our investor deck.
Our goal is to provide insights into the current state of the business.
Our challenge is an opportunity.
And to keep you informed of our progress.
Based on your feedback we can do a better job of sizing the opportunity for you and be crystal clear on what we believe it will take for the organization to achieve its potential.
We are grateful for your time today and recognize that we are asking you to process a lot of information.
We welcome your questions and feedback and look forward to reporting on our progress throughout 2020.
With that let's open the call for questions.
At this time is will be conducting our question and answer session in order to ask a question. Please press star the number one on your telephone keypad to allow for as many questions as possible. We ask that you. Please limit your questions to one question with one related follow up. Your first question comes from the line of Eric Sheridan with U.P.S., Eric Your line is open.
Thanks for taking my question, Ben and thanks for all the detail on the call lots of gift through.
Maybe two if I can have on flight <unk> you talk about the factors you can control and the transition, but this is kind of go through external way to frame what investments whether it be in dollars here in terms of time and effort actually put behind those factors you can control and how we should be thinking about those factors solving.
Not only through 2020, but against the long term goals of 2022, and then secondly, what we think about capital and deploying capital that against the business, but also we had shareholder returns.
On how you're thinking about shareholder returns against what your balance sheet looks like the free cash flow conversion of the company again, not just in 2020, but maybe across the medium term goals for the company. Thanks guys.
Thanks for that Eric I'll I'll start and then Melissa can jump in on especially as we get into the capital allocation.
If you look at slide eight net that that column on the from in the two I think just to try to frame that a little bit and Weve laid this out as you think about our milestones over the course of the over the course of the year, but.
You know there they're going to be frankly, all consuming and every every piece in here is is a critical pieces. We think about moving forward just highlighting the first one on that slide being that the goods exit itself and that's going to be a significant undertaking for us.
As we mentioned in prepared remarks also we brought in some some additional execution capacity and strategic capacity on that side to help us navigate that said we are doing the right things by all of our core stakeholders, there and moving through that's going to be a pretty significant undertaking obviously less about significant incremental investment outside of bringing in bringing in some.
Some help from from our.
You know execution assistance on that side.
We really move into the other pieces of traffic in inventory.
Experience et cetera.
Those are those are the crux of our strategy and so much about that it's less about incremental investment overall and more about reallocation and focus of the of the investment that we already make as a company so putting our resources.
On the biggest opportunity areas as 100% of their of their time and energy. So while there will be some some areas, where we where we had the up I would particularly expect us to put some additional capacity on the sale function as we start to scale up and roll out two additional cities I would also expect that to be bought really buffer.
We are addressed.
Self funded frankly by.
Moving resources from other parts of the company to do and enable us to do that.
Hi, this is really geared around reallocation and focus of our energy given the total capacity the company and less so about incremental investment on a unit level.
So on capital Yeah. So just to reiterate what rich that is essentially really this is allocating our capital at our resources kind of differently with any organization across supply marketing and product. When you think about ultimately that's how we're thinking about cat capital Alan.
Occasion over the next few years.
We are going to be focusing more of our capital allocation really up to support our.
Strategic goals that that weve outlined and at that rate outlined in detail.
When you think about kind of over the longer term, though and free cash flow generation of the company. We have in our slides outlined our what we believe our target financial model essentially what that calls for that free cash flow conversion rate of 65 plus percent.
Since we're operating at scale here, so what I would look at you know think about 2020 and 2021 as the building years, and that's where you know capital allocation will be more focused on a really capturing that one trillium class a local marketplace opportunity.
Thanks, so much.
Thanks, Eric.
Your next question comes from the line as Deepak Mathivanan with Barclays. The past your line is open.
Hey, guys. Thanks for taking the question.
Couple of questions.
And specifically in November that led to the sharp decline in traffic well they don't related goods.
Any changes.
Accelerated impact and then subsequently you noted the rebound in January.
That's the first question.
Good question.
And the challenges its business.
Turning to you on the opportunities depend on lots of growth in local.
Can you provide some color on kind of what categories, maybe a planning to improve density and.
These challenges in your view, so largely related to selection and conversion or.
Rocky also due to shut off the top of funnel consumer demand.
Thank you.
Thanks for that deep pockets great questions.
So specifically, yes, I think in it that well get November it's hard to separate I think impossible to separate the external factors and just broadly in the market from from what what we saw I think we saw an extremely frothy competitive environment, but you know where large scale ecommerce play.
Areas, we're playing in some of our historic strongholds, particularly on the paid marketing side. So all of those were contributing factors, but I think it you know the other day it boils down to the value proposition that you're putting in front of a customer and I think to what we've seen in particular over the course of the last year in the goods landscape specifically, it's just it's a it's a different way.
World out there and it's accelerated really quickly customer expectations of of shipping Expedients is you have fundamentally changed in and the requirements of comprehensive inventory et cetera, and or specific orientation around experience based retail or was it goes had been very very fast and I think within that we had a spot where.
You know consumers just weren't engaging with our product in the way that they have in the past and I think a lot of factors contributed to that.
So we felt that that occur.
In in November as our I think our you know as we mentioned our primary challenges were around goods in that period.
And.
That however has a a cascading impact on traffic overall and as a result.
All of our categories, but goods was really the crux of that and that's the time when we're also.
We are where the entire merchandising strategy. The company is generally pushed around good. So we had to get in there and start to make some changes on that front and given that the late timing of the holiday peak. This year really overlapping December we didn't have an awful lot of time.
In order to in order to really is not just effect change, but really drive a broader impact and effective at the overall output of the quarter.
But thats a you know that leads me into the you are really the second part of your question.
The rebound in January what's driving that and local and Thats really it's building off of some of the changes we started to make as we saw.
And it's especially challenging holiday peak period in goods in the number one piece of that as we started reallocating impressions and reallocating merchandising to our core local business.
And what we've seen from that business, which partly gets into how are we are we confident in our ability to unlock the value. There is we're seeing our customers respond. We went from a place where I think you can overall see a unit trajectory and Q4 was not any good place.
Were you know were strongly negative in that and the low in immediate medium to high digits single digits and and at least in the U.S. and.
And we saw pretty quick return there to growth and customers reacting really well to the merchandising that we're putting in place and within that we're also able to merchandise more of the inventory we've been accumulating in that space and we're seeing customers responded really well do that.
Thats, a big piece of our building confidence.
But as I mentioned in prepared remarks, as well, we just but we also have a really strong and big customer base in local.
That we've been we've been exposing a lot of goods to and as we've started to focus more of our our product in our cat our classification and merchandising to local we're seeing good responsiveness there.
On your second question I guess second part of that second question is this a selection thing a conversion thing a product thing.
If you look at our strategy, we'd say, it's in all of the above thing I think absolutely. If you if you consider the growth and low discount or market rate inventory.
Just having coverage having what people are looking for is it is a big driver. It's been a nice growth story for us over the last couple of years, just providing high quality inventory to merchant or third consumers when they're looking for it.
That's broadly a conversion opportunity. It's also a stickiness on top of mind opportunity on the brand. So certainly we need to continue to do more of that I think what we've seen especially as weve accelerated just broad coverage of inventory.
Over the last couple of years, we've seen as we build density consumers have have responded really well do that and they've responded with higher purchase frequency, which is really critical to unlocking.
The core opportunity there, but we know we need to make changes to the product and I think this is a spot where especially as you gain inventory your product has to be a lot better or when it comes to search and discovery and browse and navigation and particularly in local.
The idea is if things like time of day day of weak and contacts to make a really big difference and frankly as we've been trying to optimize around multiple different businesses in categories. We havent moved that as far as fast as as we need to move it.
We haven't moved as far as fast as some of the competitors in the smaller upstarts in this space have moved it and that's just something we need to we need to be double down on and with 100% of our time energy and resources being spent on moving that forward. So we can.
What is what we believe a very very big market opportunity here, where we where we have a leadership position despite having some challenges over the last couple of years.
Your next question comes from the line of Thomas Forte with D.A. Davidson Thomas Your line is open.
Great. Thanks for taking my question I wanted to know as of today, how many international markets you operated in and the number of those markets that are cash flow positive.
Thank you.
Hey, Tom Thanks for that so we operate in roughly 15 markets today or 15 markets.
If thats, what you mean on the country level, we operate in hundreds of cities and know what do you want to add yeah. I mean, we haven't provided.
You know cash flow details on our on our specific business, Tom so beyond that.
Really you can kind of look at.
Our disclosures on.
What we think the business generating from a piano perspective. So you can certainly kind of looking at that as as a guide.
For 2019, and international has been particularly challenged and Q4 essentially was was no difference and UK given the macroeconomic condition that we've seen there you know certainly face that has a similar dynamic to what we we saw in in Q3, but.
We did also see kind of broadly across the you're at a macro challenges impact there we still believe in the international opportunity.
And we still believe we're underpenetrated, there and have a lot of room to run but.
Certainly still think macro and good.
Deal with a global issue not just the North America issue in the fourth quarter.
Thanks for taking my question.
Your next question comes from the line if you got a reunion with Wedbush Securities that all your line is open.
Hey, guys. Thanks for taking my question.
So first.
Uh huh.
Address maybe that the balance of.
The traffic between good and local.
Local the declined 11% of the U.S. men rebounded in January so.
Good historically and I know this is deteriorating, but good historically driven some traffic to local.
We're going to be pulling that out where we are reallocating impressions to.
The logo for that that should offset and I know we had to rebound in January so just how to think about with the <unk> maybe of the degree of growth in January salable that is.
Are there are there going to be puts and takes or is this really all all the positive.
Hi, take now goods in the out hitting on reallocating B B impressions.
Second on I'm on customers.
You noted.
Headwinds increasing in Fourq, you I think.
Maybe you could just refresh my memory, but I think you were expecting the customer headwind to flatten out in 2020. So that's something that's going to continue pressuring and how does that.
Lead to unit growth headwinds or or otherwise in 2020, and then lastly on a modeling question I just want to make sure understood you are going to be you're going to be reporting goods as discontinued operations beginning in one Q. So we should we thinking about pulling that out of our kind of revenue EBITDA numbers.
Immediately thanks.
Thanks.
I'll start on on the traffic side and that you just and how to think about overall, the exit path and impression reallocation and just how balance of traffic plays into that so your goods has been a significant part of our traffic is highly seasonal in particular are just we didnt, obviously see the kinda.
Seasonality, we expected in Q4.
But it has been historically, a significant driver of traffic, particularly that time of year.
I think the key piece however to think about it is how we as how we manage our impression pool.
And as I mentioned historically, it's been around 40%.
Of traffic going to goods and certain times of the year in Q4 that could be as much as 60 or 70% I'm during peak periods, but well what we've really seen change there over time, it's not just the volume of traffic were mix. It's just that the overall utility or productivity of the of the impressions that we've been allocating to goods has been declining.
As a part of that we've also just seen.
More division and more clear division in the customer base and you as you point out historically it has been more of a driver of of local activation.
And at times, we I think in a in the past. We've shared is one of our largest channels of local activation. That's just no longer the case and we've seen that that the customer base is becoming more specific and what their shopping behavior really drives and so those things combined where do you have a lack of utility of the impressions and a lack of cross shopping behavior and.
More more division are more calcification and the customer base. It makes it a lot easier to make these kinds of decisions still very hard call to make given that the overall size of the business, but makes that a lot easier so with as Weve. As we moved into January are really in them and as we exited Q4 and ended January our focus has been on really.
Managing that impression pool.
And starting to and starting to move more and more and more to do local I think you can see that as a as a consumer if you go to the feature tab on the mobile App, you're going to see an awful lot less goods in some cases, you may see non.
As we're learning through a lot of what you point out which is what are the puts and takes in this process and in particular, what are the puts and takes with our cross shoppers. That's a core focus for us as we move through that process is understanding how to retain as many local good cross shoppers as possible because all of those folks they get their hair cut a.
They look for things to do on the weekends with their families.
All of all things that we were focused on moving forward.
And how do we get them more engaged in the local side of the marketplace.
And that's not that's really the piece there within their the puts and takes some of them I would consider it and I said that we're going to be pretty aggressive, especially in north America on that transfer and that transition of impressions toward local.
What I would it what were what were generally seeing as we mentioned is local responding really well and that's a big unit swing in a relatively short period of time as we've seen these impressions go but at the same token or by the same token you're going to see things like goods revenue potentially declining really rapidly in North America as we migrate over and.
You know that Theres, a third party first party part of our business.
And the difference between revenue between goods and local that will you're going to see that as we move some of these pieces, but you know our focus is on maintaining the health of the customer base and driving that local engagement and growth. So there will be puts and takes long story short and Melissa.
Add some color.
Yeah on on a January side I think that.
One item that I would mention there as well and you can see in.
The goals that we outlined in the in the press release and mentioned on the call that one of the target points. We had was in two ways, we expected North America units to to return to growth.
Gross and ultimately we are seeing the benefit in January as monetizing. The importantly, we get more effectively by shifting from going to local but the way that I would think about it is that's kind of step one of the process really to wait just when we start to see some of our strategy pay called if you think it as a different.
Investment, we're making around our inventory our products through modernization as well as ultimately the Bradley action, what Weve tried to outline for you any investor deck is essentially kind of <unk> a timeline of when you should expect those milestones to start to hit so that you can measure that progress there.
[noise]. So that's on January on the headwind side for customers. So you had mentioned are asked a question on what we're seeing there what were expecting so headwinds did increase in Q4 on the customer side and that was largely.
Driven by good a lack of engagement on the platform. So we did see customer losses come in at a more accelerated pace than than we expected in what we had seen.
In the prior quarter as you look forward to 2020, and 20 2021, we have not provided ultimately customer and customer numbers. There the way that I would think about it though is you.
We mentioned that we had 8 million goods only customers and we have 35 million at that 35 million remaining customers are engaging with local and travel.
Stopping across our platform today, we're we're going to really be focus is on retaining those cross shoppers.
Historically have purchased across the platform, so I would kind of focus on.
That that 35 million customer base that we've referenced in our remark and ultimately what will be driving towards is is retaining that cross shop or is it then engaging ultimately that customer base across the platform, yeah, and only one thing that all I'll add there is when we talked about in the moderation of our of our customer losses in 2000.
20, we hadnt, we hadn't completed an exit of goods in there. So as we do as I mentioned, we do have more of a calcified customer base. There. That's just been thats been more focused and specific to goods only as we start peeling back and good and and moving more to local.
You should expect that those some of those customers were and work hard to get them into local but we should also expect that some of them that our goods only shoppers that think about us only as a good brand as they start seeing less and less goods, we should expect them to.
To increase their attrition rate I mean, it I think it's reasonable to expect that and I wouldn't want wouldn't want you to think anything else Yep and then the last point.
Tightening of discontinued operation. So the way that you should think about that is ultimately we will we start to trigger discontinued operation when we exit the operations of those businesses. So the timeline that that we've given there as we would expect that by ended the third quarter.
We would be exiting the North America business and for international I bet that timing will likely be by end of year.
As we said in prepared remarks are works, how dynamic that we need to work through there.
Such that that could impact the timing, but that's really how you should think about that when we would get discontinued operations treatment. It's got to be later or later in the year when we ultimately exit.
Your next question comes from the line of Brian Nowak with Morgan Stanley Brian Your line is open.
Thanks for taking my question just wanted to touch on the local experiences strategy a bit maybe talk to us about so the strategy to have density sufficient density in 10 cities by the ended the year. How many cities do you have sort of that density that you're looking for in rate now and what are some examples that we could sort of look at just sort of understand where.
Year, where you're headed with this and then from an execution perspective talk to us about what changes you have to make to the salesforce or how do you think about sort of timing of reallocating and retraining. The salesforce to really focus a lot more on these these local experiences within the was of the 10 cities. Thanks, so much.
Thanks for that Brian So I'll I'll start.
Yeah, I think I'd say, one we have is a very competitive space. So I'm wondering were not going to do is layout, our roadmap for our city focus on that side, but.
As I mentioned, just and one of my comments, just a little bit ago is that as we've been building breadth of catalog, especially as we brought on.
More and more third party partnerships and that's just build broader coverage for for Groupon. We start we've seen some natural density case studies developing in the business. We've also been focused as a company on on building upon those in more targeted areas.
So as much as we talk about cities I get the point of head is it's really a neighborhood challenge.
This is really about getting much more into the ZIP code level and making sure not just at that sub Zip code, but in for a broader market.
You have you have the supply matches, the intent and consumer demand that exists there. So just a much more more targeted a targeted strategy. That's also more strategic and how it is constructed so and I'll talk about the sales changes there in general, but it is that as we've seen at at that combination of of having.
The expected and trusted brands in a given market at a broad level and then with the really specific neighborhood level density.
In core categories that fit that market. So it's just a much more targeted and much more granular approach.
On that front, when you think about Salesforce and how we have to it and the change of the go to market strategy I'm as as we mentioned in you can see it in our Investor presentation, where this is something we're moving on right now so we're already rolling our training, we're rolling out a different performance based management structures.
Just how we think about over.
Nation to target.
Getting very specific kinds of of inventory and inventory quality on the platform on their significant changes there, but I'd say the biggest single focus is really leveraging our technology and intelligence around around demand and supply.
To be much more effective at allocating our energy and resources to specific neighborhoods and.
As we've talked about on the path in this company you know we went through a bit of I think a natural progression here, where we started out as an example in the earlier days of Groupon as just basically a one size fits all selling where every every sales person in the company could sell anything from a car wash too you into a Michelin starred restaurant.
We learn through that process, we really need vertical specialisation and focus.
And so we built that vertical capacity and within that started to scale broadly on our inventory and now I think we're moving into that natural progression, where it's about bringing those two things together broad sales capacity a knowledge of neighborhoods in locale.
And real vertical Specialisation and know how supported by the technology to make that efficient and scalable.
So there is there is a whole series of things that we're doing on that front, but it's already underway as I mentioned, we're going to we expect to be in two cities launched this quarter scaling up to 10 across the year.
And it's basically a rolling process to move from that two to 10, and where we expect to learn and adapt as we go through it.
So our teams are excited or end market there in market now and we're getting a good feedback and I expect that to take that feedback and continue to advance over the course of the year.
Our final question comes from the line of Michael <unk> with Goldman Sachs. Michael Your line is open.
Great. Thanks for the question I just have a few on the EBITDA path and non modeling first on 2020, you mentioned, we should see in $80 million EBITDA impact from the goods exit so would it be as simple as taking your prior guidance of $300 million and subtracting 80, why not and then second so.
Seems like there are few moving parts for 2020 and beyond.
Thank you guys mentioned, an additional $75 million of M&A related to gets an additional $50 million of cost savings opportunities.
Partly offset by the $40 million to $50 million of cloud expenses, how should we assume these cost savings and caught expenses flowing over time is it more front weighted thank you.
Yes.
So I can take those so first to your question on 2020. So just one clarification quite their omni 80 million EBITDA had an impact that we provided about half of that is related to add good to exit and any related disruption that we're expecting there the other.
Half of that is related to essentially lapping lower bonus funding had from 2019, just based on performance relative to targets there as well as that the cloud computing.
Migration. So that's just some clarification point on that as you think about half of the 300 million guy that we'd given in the past.
I think the one thing I would keep in mind is that was also predicated on us hitting our approximately 270 guide we've we've clearly seen deterioration in the business since that time that is effectively kind of reset that that baseline there so I wouldn't happen.
Say that it's really that the 80 million that I called out and in my prepared remarks, I do think about had asked DNA more broadly so there's a few things there that I would.
I would mention so as I said in my prepared remarks, we do estimate we've got about 75 million up direct costs associated with the goods business. We do expect that we will be able to take that was 75 million of cost and realize the those savings over time, but that time.
Frame just given a end of Q3 exit in North America as well as an end of year expectations for international as you can imagine the timing of realization of those cost benefit.
Well not fully be there until 2021.
What we also are essentially going after is another 50 million Arnie indirect cost side and the way to think about this is ultimately we are able in a kind of local experiences only world to reset our cost structure and the way I would think about that is really kind of a one time.
Reset of our cost base that we will be looking to do the exit of goods certainly does unlock the ability for us.
To do that so again, you'll start to see those costs Oh, you know over the next call. It 12 to 18 month is what we've we've said there in terms of timeline as you think about cloud App that 40 to 50 million that we highlighted there that's really over the next three to four year period is when you'll see though.
Expenses play out so that's how I'd start to think about that kind of caught timeline.
Great. Thank you Thats very helpful.
This concludes our question and answer session I will now turn the call back over to rich Williams for closing remarks.
Thank you and thanks again, everyone for joining today.
We understand that our investors are frustrated we are as well, but we also hope that you believe that this strategy is the best path forward for Groupon. We also hope that we've effectively outlined our strategy in our plan and resources to execute.
We appreciate your support and welcome your feedback thanks again.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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