Q2 2020 Groupon Inc Earnings Call
[music].
Good day, everyone and welcome to coupon to second quarter 2020 financial results Conference call.
At this time all participants are in listen only mode. A question and answer session will follow the company's formal remarks.
To ask a question pesticides key 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 Chief Communications Officer, Jennifer Beugelmans. Please go ahead.
Good morning, welcome to grew by the second quarter 2020 financial results conference call on the call today, our interim CEO, Aaron Cooper and CFO Melissa Thomas the following discussion in responses to your questions reflect management's views as of today August seven 2020, only and will include.
Forward looking statement actual results may differ materially from those expressed or implied in our forward looking statements additional information about risks and other factors that could potentially impact our financial results is included in our earnings press release and in our filings with the FCC, including our annual report on form 10-K.
For the year ended December 31st 2019, and subsequent quarterly reports on form 10-Q.
We encourage investors to use our investors got Groupon got confirmation about the company.
This website the reports that the company files or furnishes with the FCC corporate governance information and select press releases and social media posting.
On the call today, we will also discuss the following non-GAAP financial.
The guy free cash flow and FX neutral result.
In our press release, and our filings with the FCC, Egypt, which is posted on our Investor Relations website, you will find additional disclosures regarding the non-GAAP measures, including reconciliations of these measures to the most comparable measures under U.S. gap.
As we discussed our results. During this call noted all comparison, unless otherwise stated 30 year over year growth.
As reported all gross profit comparison, our FX neutral and with that I'm happy to turn the call over to Aaron.
Thanks, Jennifer.
Thanks to everyone for joining today.
We're looking forward to give you an update on a recent progress and further outlining our strategy and execution plan to win in local.
When I was appointed the interim CEO in March I had two primary objectives.
First was to work with the team to stabilize the business.
That time, Koby 19 already begun to wreak havoc on economy.
Our local business had fallen nearly 80% in the world was entering a global shutdown.
We were in a cash burn position and we needed to accelerate and expand our plan to rightsize our cost structure.
I'm proud to say that over the past few months, we've stabilized the business and strengthen the balance sheet.
Today, we have nearly 800 million cash and we generated over 70 million of free cash flow in Q2.
We have created to substantially reduce cost structure and honor weighted to 225 million fixed cost out in the business.
Again, we have cut variable marketing spend by over 50 million in Q2 alone.
You're welcome addition for the future.
On today's call Austin much of my time talking about my second objective our strategy to return the company to growth and our execution plan.
But first I'd like to provide some context smell remarkable progress we've made as a team over the past few months.
As I mentioned, we've lowered our cost meaningfully.
Based on the actions, we're taking our SGN they will be approximately 30% lower compared to 2019.
Given this we can be significantly more profitable on an adjusted EBITDA basis at lower levels of gross billings and gross profit.
Well Melissa will provide you with additional context for how and when we expect to unlock the power of our financial model, we believe that even a gross billings gross profit levels that are lower than what we delivered pre coded we can achieve adjusted EBITDA comparable to were higher in 2019 levels.
And the strong level of adjusted EBITDA flow through is possible, even if we're unable to achieve the growth that as I will outline today, we are confident we can achieve.
We have created a more durable and nimble business that can pivot quickly and respond to macroeconomic shifts, creating a path forward for groupon, even if the impact of Colby this prolonged.
This means that when the recovery does happen, we'll be ready and able to leverage economic recovery into significant business gains.
So, let's turn to our growth strategy.
Well he had already announced our intention to focus on winning and local pandemic gave us unique opportunity to figure out why the coupon business had been it is state of decline for many years.
Hi, along with the rest of the management team felt strongly the coupon should be able to grow its local business, but we weren't despite many initiatives that we had put in place over the past few years to achieve this goal.
Question, we had to answer is why.
We estimate that the local market opportunity is north of one trillion.
And groupon as a leader in this space.
Despite these two facts are gross billings has been declining for many years.
This is a fundamental disconnect that our go forward strategy must address.
Within local we believe we're most differentiated in our experiences with our seems to do beauty and wellness and dining offerings.
We also believe that North America alone there are easier more local experiences that the average customer participates in annually and yet our average purchase frequency is between three and four times per year.
For some time, you've heard Groupon talk about how we intend to ignite the flywheel and capture more share in this large market opportunity by bringing on higher quality merchants greater density of deals friction was buying et cetera.
In fact, we breaking down our past initiatives were all meant to get at the same problem, making groupon work more for merchants and customers and making grew by more of utility. So people don't drive coupon just once a quarter. They buy once a month once a week, maybe even once a day at some point in the future.
So we did an in depth root cause analysis to answer the most basic question why do people used to buy more often.
The answer is simple and not surprising.
We need more quality inventory interest consumers the kind of inventory that attract consumers on a regular basis not just every once in awhile.
In talking to quality merchants, the kind, we want to attract to maintain your two themes consistently.
I would be on groupon, but you're asking too much for me in terms of discount margin.
Or I don't ever want to be on groupon or any other discount site for that matter.
Ultimately this analysis uncovered flaws in our core merchant and customer value propositions.
It became clear that building inventory breadth and depth with the biggest area of opportunity for Groupon.
So why haven't previous initiatives focused on inventory worked.
Up until recently, our business was large generating lots of free cash flow in an effort to maintain this output we kept trinet tweak instead of Holistically change our business model.
But given the state of the world and local we're now in a position to make more profound changes without them having impact they would have had in pre cobot 19 times.
The fixed through bond, we execute in two strategic areas exceptionally well.
Number one.
Band inventory, which means more quality inventory.
And number two modernize the marketplace by improving the merchant and customer experience.
Successful scaled marketplaces excel in these strategic areas Groupon will be no difference.
The strategy centered around creating inventory density and improving the customer in merchant experience emphasize the same areas that we discussed with you earlier this year.
However, our goal for plant is vastly different from historic plans, you might have seen and that we're going to take bold and decisive steps to add to write inventory to our platform, including building, a new product offering and revenue stream around it.
This means that substantial resources will be dedicated to expanding our inventory.
In addition, our inventory density strategy is now fully aligned with the value proposition that our merchants and customers want.
We're going to move fast tester offering and find signal before we scale, we have tightly focused the entire organization only on the initiatives that matter execution will be different. This is our top priority and we're focused on success in this area above all else.
We all know the basics for building a successful marketplace, we start with merchant adopt the foundation of supply needed to attract.
The tipping point between supply and demand on the platform you can introduce this market driven pricing tools that allow merchants want more volume or.
Exposure to pay more on an opt in basis, which will lead to intensified price competition between merchants, great new sustainable drive margins higher.
The Groupon marketplace, however was not built to be a traditional marketplace.
It started with a high cost model with merchants paying up to 75.
Merchants offer.
Built to deliver customers only to those purchase is going to sell deeply discounted deals.
The marketplace was not structure to support our encourage repeat purchase frequency at the merchant level. In fact, Groupon had no way of participating in downstream revenue opportunities a lesson merchant was willing to sell another deeply discounted deal which resulted in narrow supply.
Grow we need to build a more.
Robust suite of inventory products that will encourage purchase frequency and each flywheel that is eluded us for years focused on three key inventory initiatives.
Deals offers and market rate.
We can build more inventory that's available all the time and the covers categories in services people actually want.
So let's start with deals.
Coupon is known for great deals.
And we will not be moving away from this value proposition make our deals inventory better by making it more valuable to customers positioning and as a product that can actually drive rebar merchants and allowing groupon to participate in the resulting downstream trends.
These actions.
This meters.
To many of our deals have onerous restrictions.
You can only by once et cetera.
To put this in perspective in the last quarter alone in North America, We had over 100000 clicks on deals on our site there were actually not available for purchase.
And they can't buy makes no sense.
Our customers need to be able to try the merchants, we introduced them to a few times.
Times in order to convert them into a rig is to remove the limits that exist on deals to ensure that our customers combined deal more than one time, which will encourage loyalty to both groupon and.
And the merchant.
But not every merchant wants to run a deeply discounted deal on our platform and for even the ones that do at some point a deeply discounted deal may not make sense for their business.
That's where offers consent.
With offer inventory focused on high intent customers.
So.
This new inventory will be based on lower margins for Groupon merchant margins that are more in one.
I am with competitive sales channels.
This is about building a deeper partnership with our existing merchants through a broader offering and attracting merchants that are on the fence when it comes to join.
For catalog of always available inventory from our merchants, thereby driving purchase frequency on the groupon marketplace.
Become offers so that when our high in thanks.
Customers click on a merchant they will always find something of value. They can buy decision merchants using deals and offers together to drive growth and manage demand.
If a merchant wants to promote a new product they can lift to deal that will eventually be merchant is having a slow sales period.
Good for an existing product that might tool of expanding inventory.
I wanted by approximately 15% in the form as a discount.
For example, a spot.
Merchant may be able to provide a deeper discounts that to deal on services like a manager pedicure that may want to increase volume on facials, which they aren't able to discount as deeply in this case.
Inventory at an appealing margins drug.
Sure and added exposure for the pricing too much margin.
In any case winter weather, a dealer and offer it needs.
To always provide value to their business, reducing offers to our scaled marketplace.
Base will provide unbeatable value to current and new merchants as well as our customers.
For merchants on like other sales channels coupon remains uniquely risk free when they never incorrect cost on lets customers make a purchase.
Even with the greater density that we expect to come through from deals and offers there's still a subset of merchants that don't want to be on groupon, because they don't want to discount their products.
This is where market rates.
Inventory comes into play.
Further energize, our marketplace, where we continue our efforts to get full priced inventory on our platform.
Our goal is to have the best merchants in any given city on Groupon.
We will acquire inventory in one of several ways.
First it can be integrated through various third party partnerships with large ticketing providers booking tools and others.
These partnerships, while groupon to connect our customers with even more high quality inventory, which is conveniently available on our marketplace.
We will continue to expand these types of partnerships with our newly launched self service Avi I tool and test other options to ensure that we have the best inventory for our marketplace.
We believe that these new and revamped inventory options will allow us to provide the experience that our customers want.
Our analysis shows that our inventory needs to cover a wide range of discounts from high discount to load this consumer value proposition from by providing a combination of value selection and convenience.
In terms of our go to market strategy, we plan to incentivize our sales team to both cure rate the right inventory mix to attract potential and existing customers and help merchants optimize their ROI by selling a broad selection of deals offers and market rate inventory on groupon.
Despite our confidence in the strategy, which is grounded in our experience and research and scaled exam goals. We are focused on getting clear signal.
We have selected for markets, where we are already testing, our new business model at scale with over 150 of our sales reps dedicated to this effort.
We will measure our progress in the test markets first comparable markets and why we'll have to navigate some uncertainties around coven 19, we're hopeful we can get a clear signal by year end.
Here's the signal, we're targeting a 25 to 50 per.
Sent increasing inventory, which will be focused on key zip codes, and our beauty and wellness and things to do types of experiences.
We believe this will create inventory density we need to drive customer engagement.
At the end of our six month test our goal is to improve unit and gross billings performance versus control markets.
We expect to see low single digit percentage point improvement at the end of six months in these metrics, which we expect to accelerate to will double digit improvement shortly thereafter.
Be clear these targets refer only to the test markets and represent a starting place for growth.
This test will also in former perspective on the rate levels of inventory density as well as optimize mixed of offers deals and market rate supply any given market.
While we have a hypothesis as we test and learn we'll be looking to refine our model and determining how and when we scale to the next 10 to 15 cities and eventually the entire country and then internationally.
We believe the existing power of our platform fewer restrictions on deals. The introduction of offers and the growth of market rate inventory will unlock the marketplace five wheel and create value for merchants customers and groupon.
As I mentioned, the vast majority the right breadth and depth of inventory, we believed at improving our marketplace.
Place value proposition is the most important marketing tool for Groupon, and we've already talked quite a bit about our inventory initiatives that are laser focused on this objective.
At the same time, we intend to deploy small focused teams to build to suite of merchant tools that help and purchase grow their business on the groupon marketplace.
Our goal is to add value at all stages of the merchant business lifecycle, and helping them attract new and repeat customers to capturing a larger share of customer Walt.
As we work to return our local marketplace to growth. We believed that over time, we can also layer and new powerful paid tools and services that will be accretive to our business model and marketplace growth.
We know we must also create a modern experienced that reduces friction for our customers.
From discovery to search to purchase redemption, we have to make it easier for our customers defined by and redeem a groupon and interact with our merchants.
We also believe we can elevate groupon as a destination where customers go to discover fun and memorable while we have made progress over the year.
Which we still have work to do.
Product development strategy will revolve around testing and launching products that reduced customer friction and improve user experience.
This means it in the future all of our inventory should be bookable or in some other way connected to one of our frictionless products.
And want to offer an improved user experience. It offers a combination of new personalization inspiration and convenience led features to drive conversion and purchase frequency.
For additional details on our second half 2020 product roadmap. Please see our slide deck posted on our Investor Relations website.
More inventory better inventory and frictionless buying.
Okay. So why would we be able to execute this time around.
After we released our first quarter results I spoke to some of you about how we intend to execute going forward.
While some of this detail is not new it's important so I'll take a minute to highlight the three key differences in how we intend to execute.
First we are going to be relentlessly focused on our strategic priorities core verticals in key markets.
Second we will test learn in Ituri quickly using more data before we greenlee projects looking for proof they are likely to add shareholder value.
And finally third we will empower teams to make decisions in move quickly.
Before I turn the call over to Melissa Let me leave you with this.
We acknowledge there is a lot of hard work ahead, but the same time, there's a lot to be proud of now.
Over the second quarter, we've stabilized the business growing our cash balance and launched a growth strategy that is directly tied to our core merchant new customer value propositions.
By expanding our high quality inventory to drive unit volume, we believe we will unlock the marketplace flywheel and deliver topline growth and profitability.
We are committed to returning group on a growth and we are confident that we have the right strategy and execution focus to achieve this goal.
Finally, I want to give a huge thank you to our teammates here Groupon, who have shown continued resilience dedication and determination as the foundation for future growth.
Im so proud of the results were beginning to deliver.
So thank you.
I'll now turn the call over to Melissa.
Thanks, Aaron and thanks again to everyone joining us this morning.
I hope, you're staying safe and successfully navigating the combined impact of Covington 18.
I want to express my gratitude to our team here at Groupon Your hard work and continued focus on helping US stated pandemic is really inspiring.
Since we provided a preview of our second quarter performance with our first quarter results in mid June.
I'll spend too much time today going through them in great detail.
Today I'll use my time since Scott.
Our balance sheet and liquidity.
A few key insights from second quarter results.
Key data points on July trends.
Progress on executing our restructuring plan.
I'll end with how to think about our financial model over the longer term.
As usual you can find press release and form 10-Q.
That we filed yesterday.
Starting with an update on our balance sheet and liquidity position.
In the process late March look cool units were declining nearly 80% and we were burning cash.
Since late March we pivoted quickly to stabilize the company and strengthen the balance sheet.
We designed and implemented and multiphase restructuring plan to create a path forward to reduce our fixed cost base by $225 million on a run rate basis.
We cut our variable marketing spend by over $50 million year over year in Q2 alone by significantly shortening payback threshold for going brand investments and aligning spend.
We also implemented.
In a number of other incremental in year cost saving and liquidity preservation measures, including furloughed to position the company for the near and long term.
In total we further owned or initiated access of approximately 2700 employees within our base of nearly 6300 employees as of March 31 years 2020.
In addition to the payroll action, we continue to sell good instead of exiting the category as quickly as possible.
And we accelerated our efforts to move North America local merchant from fixed payment term to redemption payment terms, which supports cash flow by reducing our we send exposure and lowering our networking capital needs.
Yes, there these actions allowed us to generate over 70 million of free cash flow in the second quarter. Despite the impact of carbon 19, our local business.
We actually 7 million at the end of Q1.
Which included 150 million outstanding borrowings on our revolver.
At the end of Q2, which incurred.
The 200 million an outstanding borrowing on our revolver.
And we successfully amended our credit agreement to team Covenant relief through Q1 2021.
As a result.
Our balance sheet is stronger and we are well positioned to invest in our future.
This has been a lot of hardware and I'm incredibly proud of our team.
Since March we've rebuilt our foundation and created the financial stability, we believe we need to weather the ongoing impact of coded 19 entered driver.
Turning now to our second quarter results.
All comparisons I'll be referring to are on a year over year basis, unless specifically noted in the second quarter. Gross billings were 583 million revenue was 396 million gross profit was 137 million and adjusted EBITDA was 1 million.
We delivered positive adjusted EBITDA in the quarter and generated over 70 million of free cash flow.
Even while our local units were down nearly 70% due to climate 19.
This is a testament to our team's ability to quickly and dramatically reduce our cost structure, while implementing cash preservation strategies.
And it speaks to the financial power of our model.
Second quarter adjusted EBITDA significantly outperformed the outlook, we provided with our first quarter results.
Due to better than expected gross profit performance.
We had 38 million active customers on a trailing 12 month basis as of June Thirtyth.
Since active customers as a trailing 12 month metric we would expect this number to decline as it continued to reflect the impact of current 19.
During the second quarter, we sold a total of 23 million units down 35% growth.
Global local unit were 8 million down, 66% and global goods units were 15 million up 38% consolidated marketing expense for the second quarter with 25 million down 72%.
Thanks for the second quarter was approximately 144 million down 32% as we started to see that benefit from the cost saving measures we put in place throughout the quarter to position the company for the near and long term.
We also laid the foundation in the second quarter two ships sales of good to a third party marketplace model, which we are on track to largely complete for North America by the end of the third quarter.
Yes exited our warehouse operations globally and have taken significant cost out of our Thats operation.
For modeling purposes, we expect the migration of North America to a third party marketplace model to happen throughout the third quarter and to be largely complete by quarter end.
We expect to start the international goods transmission in the fourth quarter 2020 and to make meaningful progress thereafter.
Turning now to our July operating performance.
We have seen volatility, which we expect will continue until couple of 19 subside.
In July in North America. They said previously led the recovery for us in the second quarter I've seen a rising Carmel mountain cases, and if we pull back and performance.
This is largely been offset me an acceleration in performance in markets that were slower to reopened.
Our ability to offset the performing pullback in various markets.
Illustrate the durability of our business model.
With geographic and category diversity, we remain well positioned to continue to pay that as needed to respond to changes in the macro environment.
In international we are encouraged by the trends, we're seeing in local where local unit performance continued to accelerate sequentially in July and more countries lifted restriction.
And then the different dynamics across the markets in which we operate we're taking a market by market approach to the recoverability over the next six to 12 months with local opening backup in certain markets and closing and others.
In a carbon 19.
We will lean back into good and other relevant inventory as necessary.
Turning to our multiphase restructuring plan I'd like to update you on the progress, we're making on that front.
We initiated the first phase of our restructuring plan in April and we will begin.
Continuing on the second phase this month.
In 2020, we expect to realize approximately 140 million of savings from the combination of our multiphase restructuring action and furloughs.
In 2021, we expect to realize approximately 200 million and cost savings from our restructuring action.
The amount of savings we realized in 2021 could be impacted by the timing of negotiations with various works council and consultation proxies in Europe.
When complete our multiphase restructuring plan should allow us to reduce our fixed cost structure by a total of 225 million on a run rate basis.
This fixed cost base will include a sustainably lower employee count and in total reduce our fixed employee base by approximately 40% over the next year.
As part of our restructuring efforts, we are taking a hard look at our go forward country footprint.
Our evaluation is considering each international countries profitability.
It is physician.
Market potential complexity and cost to exit.
We cannot go forward international footprint, you will see us operate differently.
We will prioritize our investments in international to those countries, where we believe we have the most scale and market potential.
Look to rightsize the cost structure in other countries that generate positive cash flow, but don't have the same growth opportunity.
With all the changes we've made to reduce our cost base.
I want to give you some insight to our financial model longer term.
First as Aaron mentioned, if you look at just the reductions we are making to ask DNA. These alone should allow us to deliver solid adjusted EBITDA over the longer term.
If we sustain this level of SDMA and gross profit returning 80% of free covered level.
We believe we will be positioned to deliver approximately 250 million of adjusted EBITDA in 2022.
And if gross profit returned to 90% of pre covered levels. We believe we will be positioned to deliver approximately 300 million in 2022.
However, we believe the business model changes that Aaron outlined can dramatically improve our financial performance over the long term and allow groupon to achieve topline growth.
We believe we need to revolve our business model to improve supply encourage purchase frequency and drive topline growth.
Even if it comes with lower average margin.
Well look to provide more clarity on the potential upside to our financial model I think.
Today, we talked about moving you should get that matter.
As we live.
Let the scope of our actions in investment empowering best merchants to join and thrive on Groupon and getting our.
Customers, an amazing and frictionless expandable by how we talk about our business.
To sum up excess looks like that and the breadth and depth of inventory.
Being lower margin.
Profit margin.
Second.
We returned the company to topline growth billings growth.
Hi, attracting new and repeat customers.
Once we have mop this market.
Well placed velocity, we plan to use industry proven tactic to increase allows to recover margin overtime.
With a steadily expanding top line and a lower cost structure, we can generate strong profitability.
You will be able.
Our total active customers.
The total group on say purchase annually or units.
The total sales as purchases generate per year progress filling.
And the margin we earned from those sales gross profit.
We're excited to be on a path that we believe will allow us to not only reach inflection well begin to restart the growth engine for Groupon feature.
They are grateful for your time today and with that let's open the call for questions.
As a reminder to ask a question you will need to press style.
Fine on your telephone to withdraw your question press the pound or hash key please standby won't be compiled acuity roster.
My first question comes from the line of Eric Sheridan with Yes. Your line is now open.
Thanks, so much in the hope as Youre, all as well with every one of the team there with Groupon two if I can on the merchant side wondering though a little bit more detail on what you think you're trying to unlock on the merchant side is it going deeper with existing merchants is it reengaging with merchants to be tried the platform.
You're right you just drill it can lead to reengage with them or is it you're bringing new merchants to maybe had not transacted or lifted supplied with with groupon in the past and what do you see as some of the keys to unlocking that on the supply side. The second question on the demand side there it sounds like obviously getting velocity of shopping among your.
Power users your current basis is pretty important for the success over the medium to long term do you think that is a supply issue or do you think that to you I issue or remarketing issue. So again. The second question. We also like maybe a little bit more granularity and what you to unlock is from a shopping velocys standpoint. Thanks, so much.
There. Thank you very much of the question, you're you're getting right at the heart of the strategy, which the teams is just work so hard on and I know we talked last we said we're excited sharing with you today. So I appreciate you coming.
Right. After it let me, let me take step back and just.
Sure a little bit of the broader context, and then I'll sit your questions about which merchants and how we're going to go deeper and how that will impact new merchants as well as what we see is like whats blocking customer from buying more opposite those writing.
In the broader context.
Groupon is a large inspiration marketplace and this is what we've done for years when groupon suggest something that customers. The customers react. This is something that's very special to us and for showing Groupons, which are deals in the Willy those are deals we saw billions of dollars in sales equaled customers and merchant.
Lover deals offering.
What we're doing now is we're adding offers to complement deals.
What offers do is it paves the way for us to expand to the larger destination marketplace Tam that's to trillion dollar Tam that we've been talking about with a proven marketplace.
Growth approach.
So what offers are going to do is though the service hiring 10 customers, which are people that are looking for services that they want so the customer's always have something to buy but we map that directly and that's just that's the large thing where our offers complements deals and so the way that that's going to show up with merchants is that.
Merchants now.
They can add more and so I talked to merchants all the time and so one of the merchants that just struck me so clearly.
It runs a salon.
The way it works right now as she offers for deals.
But then she will not recur deals for repeat because of the economics not with offers she can offer deals to repeat this particular case, we're talking about a match here now customers can you comment and repeat on the manager many times because of the lower economics. In addition, she doesn't offer facials on Groupon at all the reason, it's when you get into the detail.
It's interesting the way she runs or business as she pays other people.
To do them accuracy pedicures. So she knows the economics she does the thesis yourselves.
So as a result, just want to put our big discount liebig margin on top of professionals, but at an offers economics. This is not something she could do.
So for the customer side, which this then helps exactly what customers want customers want they want to be able to buy from virtusa. If they want they want to be able to repeat services.
And they want to be able to buy more so if a customer comes to our site looking for official and this merchant hasn't been able to put their face on the site the customers disappointed in the merchant missed it out in the demand.
So to answer your question, we're going after deeper relationships with our merchants that the example, I just shared we're going after new merchants don't expect it to appeal to based on all of the work that we've done on research and talking to merchants over the years and this actually goes right at the heart of customers you like you know brands.
Yeah, and the one point I would add Eric as well as chip.
As a reminder, that the unlock that we teach our model, it's really driving purchase frequency and when we look I just one additional purchase from.
Jeff talked North America, Costamare alone that opportunity is greater than 70 $750 million that booking annually. So large large opportunity died that financial model there.
Great. Thanks, so much.
Our next question comes from the line of Eagle Eye reunion with what Bush Securities. Your line is now open.
Hey, good morning, guys, but thanks for all the detail so really helpful to hear the the strategy laid out yeah. That's a wants to ask on.
You're getting getting through and in the current environment.
Where there's still a lot of local businesses that are closed maybe a little skittish to offer discounts or things like that how are you, but how deep are you in enrolling up the strategy for us for offers and building out. The inventory density you started have you seen any any resistance.
For the merchant side.
Thank you know what let's wait until things things open up a little bit more just how's that progress been going and then a follow up on on the marketing question.
Is there a.
The shift in marketing strategy that comes with that kind of highlight to.
Consumers as well that kind of.
Theres steeper discount that 15% Austin things that are full price that could drive people into the platform more frequently for the top of funnel. Thanks.
Thanks for the question on the strategy.
Let me, let me tell you where we are our how we're running the test that we talked about in prepared remarks.
So the test design.
It's fine signal quickly we have four test markets and we have control markets. The teams are aligned to get the right in the trend of platform. It quickly and if it works, which were planning it will and believe it will well see billings lift within about six months. So these markets will be improving first our control that's what we're looking for and that's what we expect to see.
The tax is going to inform the right level of inventory density. This gets after your question as to how merchants are responding and will help us understand the optimize mix of deals offers market rate, which applies the examples the manager pedicure merchant that I talked about earlier Medicare Medicare facial merchant I talked about earlier and so what the teams are doing either.
Gapping daily to the test and insights to.
To make sure that we deliver on our plan to get signal six months.
As for marketing, yes, marketing's involved here as well so we've done as we segmented all the customers and all the merchants have marketing communication clients to bring.
Customers along to make them aware of this expanded inventory top offering. So an example, tying back to the example, I gave us the merchant would be if you were at customer then went into that merchant.
When you bought the Medicare for years, we haven't allowed you to buy the Medicare again, and we haven't allowed you to buy that they show because the Murphy couldn't put the face a lot. So this is a straightforward marketing opportunity there marketing team can't wait to get after.
Well if anything that.
Thanks, Okay.
Thank God.
Well I was going to all of us follow up on a separate thing if that's okay.
I.
And.
Walking a lot about local which which makes a lot of sense, but goods also.
In the form that drove.
A big part of the beat in the quarter and obviously.
In the current environment E Commerce is.
Taking on a new life and you guys made the decision to move to Threepl not exit good completely just wondering if you have any updated thoughts on on the goods business and expectations for for going forward.
Makes sense to kind of stepped into it a little bit more than maybe you were thinking a few months ago I'm just thoughts around goods a little bit more thanks.
Yes, thanks, asking I'll take this opportunity to congratulate the goods team because you called out they've done a great job onto the pandemic onset at the end of March. This team has really rallied along with our marketing team and in shifting and taking advantage of our full assortment. So team. Thank you very much.
As for goods, let's be clear, we've leveraged the goods category and now we feel we can leverage at substantially lower cost base.
Moving to a third party, where we sell deals and we let other people hander delivery.
I want to be clear within that local is still our top focus so even though we've used goods and it's worked extraordinarily well and our customers like it we see waiting on the other side of growing and look at.
And we expect with our strategy outsized growth in local going forward. So local is the strategy.
Goods as a tool in the Arsenal, let's anything that.
Yeah. The one point that I would add there is as you saw in Q2, the durability of our model and our ability to shifts quickly in Q goods in a period, where local demand dried up as we continue to see volatility with and due to coal bed and as we see local I'm slow.
Down in certain markets or pick up we'll continue to toggle between our diverse asset base, but over the long term, we'd expect to go to become a smaller portion of our Mexican.
Okay very helpful.
So much good.
Thank you.
Our next question comes from the line of Thomas Forte with D.A. Davidson. Your line is now open.
Great So and Louis Jennifer her for doing well and congrats on your efforts to navigate the challenges from current 19. So I just had one question has done an excellent job articulating. Your plan. The question I had is what are the metrics by which management scored remeasured firmer compensate.
Mission standpoint is it going to be revenue gross billings growth EBITDA margin or can you give some thoughts on that thank you.
Sure. Let me tell you about our strategy and the way that we're thinking about it.
And I want to back up to the broader thesis here as it relates to the way that we're thinking about the business.
And then I'll ask Melissa Phillips, and we will get after your question.
So one thanks for calling out the quarter and the work that the team has done a cross the team it's been really good work and and I'm actually been incredibly impressed with the team is resilience and their ability to to just absolutely do a great job under tricky circumstances working virtually.
So with that with the business itself things were not.
Work certain at the beginning of March at the at the end of March beginning of April and what I was impressed to see with the durability of the business overall.
Even in the dark as times, we're doing over 5 million in gross sale today.
What's the management teams is shown.
And what I'm, particularly impressed with his team was able to far left on our cost.
Structure with the lease and adapt to support our customers and merchants utilizing a full breadth of our assortment.
While focusing on this new growth strategy.
So looking forward and what were the most focused on now and what's most important.
Is that we have.
Two major horizons of value.
First is getting to our is still getting 90% to our historic size will produce record gross profit as he wasn't mentioned and execution of this strategy. This is an enormous focus of ours and as Melissa mentioned as well one additional purchase would be about three quarters $1 billion billings and help us show up in.
Taking share of that truly dollar Tam we've been talking about.
Our focus we people look recovery cases clear and management believes we haven't actually kind of upside.
Anything else.
Yeah, So Tom I do think about how the management team is being evaluated.
More broadly yeah, I would call out to two key areas first right I'm in the mix of Coke, making sure that we can stabilize the business and put the company in a position to pursue it its growth strategy and then number two executing on that strategy. So they keep the eyes that that we have outlined are certainly going to be.
With that are going to be up a focus and ones that management is going to be measured on but really what we're trying to do here is return groupon to long term sustainable topline growth as well as delivering strong EBITDA levels. So that's that's helping that will likely at the management team kind of being judged on.
Okay.
Thank you for taking my questions.
Well thanks.
Our next question comes from the line of Deepak Mathivanan with Barclays.
Line is now open.
Great.
Hey, guys. Thanks for taking the question two questions from US first and the new initiatives. You said you listed sounds really good how should we think about way or economic day grades either on the revenue or gross profit basis land over the long term compared to current levels up and then the second question was most up can you provide some color.
A lot on monthly cadence in various categories. Our board it goes and perhaps maybe some so you know how some of those are trending in July. Thank you.
Sure Thank deep.
Well I don't know why don't I start on the on the economics and I'll ask Melissa stocks as well so the entire approach that we're looking at is the way that other proven marketplaces have been built and what I love about this strategy is it just names. So clearly that were an under optimize business and that we're now going applied proven pro.
Mrs that we've seen other places at scale in many other marketplaces and advertising platforms. So offers which we will start at a lower margin.
We will get the flywheel, leaving because we already know that customers are interested and we believe the demand is there will be strong.
With that.
Aim to get to our tipping point, which really represents a new cure of strength in the marketplace.
As we get there and this is important to those economics point is with the the with marketplaces do is they allow the sellers in our case the merchants just repeat on an opt in basis.
Using tools like sponsored listings are created results and it many other tools as well.
Which allows us to capture later margin there as well beyond just you to transaction margin.
Melissa maybe to add.
Sure there.
Two things that I'll call. It first that I'll just point out that.
Depop one of the thing that mentioned in my prepared remarks, that's really important to since really given the cost reduction that we have taken even just on sustaining cost reduction, we and keeping returning to only 80% of pre cobot level. We believe we can be enough.
In addition to deliver $250 million so.
Definitely highlighting the power of our financial model given.
The rightsizing the again at the cost structure, then when you talk about that strategy and that's really further on locked to that model.
As Aaron mentioned I think she did a pretty good jobs era of articulating what the piano will look like but I think the call out that I would make on operates in particular is that we do expect that to create some pressure on GP margin over time, but it's important to share remember that we do believe that.
Offers will be largely incremental on.
To the business, so that if somebody to keep in mind, there and that we bring that margin up over a tie once we introduced a lot merchant monetization tactic.
Got it and then the second question on monthly cadence anything you can add there.
Sure I'm in terms of monthly report a monthly cadence there's a few things that we called out so any Julian Mitchell and we really start a result that we did the following that we did see continued acceleration and local recovery throughout.
As you can see for like our Q2 be but as we headed into July as we've mentioned, we did see some volatility, particularly on the North America side of the business. So.
When you think.
Within North America, Texas, Florida, California that places that led to a recovery for us in Q2, we did see slight pullback there, but state there were slower to reopen so thank you know eastern states as well.
Illinois, those has served as a and offset because we have seen sequential improvement there in July when you think about international there we did see acceleration through through the month of July and the key.
Look as compared to June and I think they keep contacts I provide theres just from a geographic standpoint, one thing to remember as you pay is our largest market historically and international AD that was a country that was much slower acutely open shop Didnt reopen really until early July and take it on a very measured approach to that.
Openings, but that has served us that a tailwind and then when you think about a category side.
[noise] H.B.W. has certainly led the recovery for us on the local side or are getting wellness, yes that is let their recovery for us on the local side and then as you would expect as local recover and yeah, we're getting more velocity there are good sense.
What would be kind of falling to to the background, there, but where we are taking him up market by market approach here size as mentioned earlier will be toggling between the different categories and making sure we're servicing up relevant supply to our customers on the site. So we believe we demonstrated the durability about modeling Kikuyu and <unk>.
Plan to continue to leverage that as we proceed through the balance of the year could you do expect there will be volatility.
Over the next six to 12 months.
Got it okay. Thank you very much.
Sorry last question comes from the line of Michael English of Goldman Sachs.
A line is now open.
Hey, good morning. Thanks for the question is helpful. The here about the new inventory initiatives and maybe to ask the margin question about offers in a different way.
I think during your prepared remarks, you said that some of the a traditional deals would result in merchants funding about 75% of the costs can you talk about what it looks like from the merchant side for some of them.
Your new inventory products like offers or market rate relative 75%. Thanks.
Absolutely and then Melissa.
Please add.
So the way the way the where explaining this to merchants and again right now our chest will inform exactly the margin structure. We go with it which is why we've constructed the way that we Uh huh.
The key with this suite of inventory product to the deals continue to drive the inspiration at a discount deals there for new customer acquisition physician to introduce new service and to get that volume. It responds noncore and has just perfected in our inspiration model for years, but offers do is offers fill up the marketplace.
Yes, that's the scene is every other market place oriented business and advertising platform out there, but the economics will be in line with other marketplaces and other advertising platforms that allows offers to compete as an always on option to complement our deals inventory.
Melissa anything that.
Well I think that the key point here is that offer is really provides a lower cost option to get some of that full catalog inventory.
On the site fill out the marketplace and drive further velocity on the platform.
Great. Thank you bye.
This concludes Groupon second quarter 2020 financial results Conference call. Thank you for your participation you may now disconnect.
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