Q3 2021 Groupon Inc Earnings Call

<unk> recorded for opening remarks, I would like to turn the call over to the Chief Communications Officer, Jennifer people. Mary. Please go ahead, good morning, and welcome to Green Bank third quarter 2021 financial results conference call on.

On the call today are interim CEO, Aaron Cooper and interim CFO Daniel Schmidt.

The following discussion and responses to your questions reflects management's views as of today November five 2021, only and will include forward looking statements 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 SEC, including our annual report on Form 10-K, and quarterly reports on Form 10-Q.

We encourage investors to use our investor relations website at investors that Groupon dot com as a way it's easily finding information about the company Groupon promptly makes available on this website. The reports that the company filed or furnished with the SEC corporate governance information.

And select press releases and social media postings.

On the call today, we will also discuss the following non-GAAP financial measures.

Adjusted EBITDA free cash flow and FX neutral results in our press release, and our filings with the SEC each of 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. GAAP.

And with that I'm happy to turn the call over to Aaron.

Good morning, everyone and thank you for joining us to talk about our third quarter results today I'm excited to give you an update on the progress we're making on our strategy to take share in the local market.

First let's take a step back and reflect on our progress this year when.

When we kicked off 2021, we told you we needed to execute in a few key areas. This year and then doing so would be both indicative of important progress and foundational for future growth.

We told you that we needed to unrestricted dealer inventory later youll pure data that shows we have done just that.

We told you we need to scale offers and beauty wellness and again, you'll hear that we've hit our goal there too.

You'll also hear that we've begun to see impact deals.

Hear evidence strongly suggests that we can then both the customer and merchant perception of the groupon marketplace and create value for our stakeholders.

We recognize that Covid is creating a lot of noise. So let me walk you through our progress and the reduced I believe starting with a few highlights on our financial performance for the third quarter.

Local represented 76% of our global billings, demonstrating our continued focus on this category and despite the impact from the Delta variant, we generated $553 million in billings of $214 million in revenue and $35 million of adjusted EBITDA solid indicators that we remain on the path to recovery.

At the same time, we are executing against our strategy to unlock philosophy in our marketplace over the past year, we've done a lot of work to identify and deliver on our merchant and customer value propositions and the changes. We've made are the most significant fundamental changes we've made to our marketplace offering in over 10 years. We believe these changes will.

We encourage our customers and merchants to do more with us and.

And in turn we think these changes will allow groupon to do more take market share drive profitability and expand our long term growth horizon.

So what exactly are we done let's start with our merchant value proposition.

We have improved the ease with which merchants can interact with the groupon marketplace.

Tended to reach to new and existing customers and given them the monetization levels they need to achieve healthy unit economics.

While we still have more work to do we've made a lot of progress and I'll be sharing some key results and upcoming milestones in a few moments.

Likewise for our customers, we are focused on giving them the value selection and convenience. They want and believe we are on the right path to expanding our wallet share with them.

We're still in the early stages of executing on our strategy to drive demand, but with the success, we've had improving the merchant experience I believe we can accelerate our progress in 2022.

Why are we confident we have the right strategy in place as we've rolled out our strategic priorities, we've been able to test and learn along the way let.

Let me give you a few key operators offs in the third quarter, which illustrate our progress.

On the supply side, we continue to make progress, bringing back pre COVID-19 supply to our marketplace.

We also continue to make progress on initiatives to expand our inventory.

Merchants are adopting our flexible inventory listing options and we are removing repeat restrictions on more deals.

On the demand side, we are early but very encouraging results from our efforts to drive repeat purchases I'll walk you through the impact later in my prepared remarks, we're seeing unit growth from our unrestricted deal inventory that we believe set the stage for more progress in 2022.

Before we dive into our strategic progress I want to start with a snapshot of our inventory base.

Last quarter I told you that we believe the fastest way for us to Reenergize, our local category is to reactivate our top supply and our team is doing just that.

And for those top merchants yet to return we feel really good about our prospects here. Our team is in active dialogue with these merchants and the message from the majority of these merchants has been clear it's not a matter of if they will return to move on but a matter of when they will return to groupon and this really matters and here's why.

In the third quarter alone. If these merchants who are mostly things to do merchants at the back on our marketplace. We believe we would've picked up between 10 and 12 percentage points of local billings for 2019 levels in North America.

In addition, we believe were impacted by the Delta variant and other transient COVID-19 related challenges.

Covid has had a two dimensional impact on our business first as Covid cases rise as with the Delta variant people go outlet and interact with local merchants less.

They get fewer massages, and facials and eat in a bit more.

The second impact from Covid has taken a bit longer to fully resolve.

Even when the cases are down due to supply demand imbalances. Some of our merchants are unable to serve existing demand in these situations. These merchants don't want to run a groupon campaign, which would drive more customers into their establishments and potentially exacerbate the capacity issues.

But with line of sight to bring top merchants back to our platform, we feel confident about recovery, but of course, we want to grow beyond recovery.

As I mentioned earlier, our growth strategy is rooted in our belief that we should be capturing more of the 80 coupon level moments that the average customer engages with annually.

Quite simply we believe we need to drive purchase frequency in unit velocity and this is where we connect back to our core merchant and customer value propositions as we've discussed in the past to do this we started with wholesale changes to the way we work with merchants, we're giving merchants the opportunity to do more with us in the past we gave merchants only one.

Way to work with US deals now we have multiple inventory options at multiple prices, which give merchants a dynamic way to list their full catalog with Dupont.

Since our test with offers we've been scaling our operating inventory product for our beauty and wellness merchants. We've continued to see merchants adopt offers in a way to expand their inventory on groupon and in fact, those who leverage offers have nearly four times more listings to merchants, who only miss deals.

As a result beauty and wellness inventory per merchant has increased over 30% in North America since we launched office.

Offers has expanded our beauty and wellness inventory, which we believe is as important as we shape groupon into the destination for local.

The team is working to improve how customers interact with a full menu experience for merchants, which we believe will allow us to further monetize our expanded inventory selection.

I'll first there has been a great jumping off point for us and are working well for our beauty longest merchants. We're now leveraging what we've learned and exploring ways to give our merchants and other local categories more flexibility.

One thing that has become clear merchants do want to do more with groupon and letting them have more flexibility in how they work with US is an important part of our relationship.

Let me give you a case study to bring this to life.

One of our top merchants is a large theme park.

Given them more flexible inventory options, we've allowed them to begin leveraging groupon marketplace as an always on sales channel.

They are listing more days in inventory across their various park locations and leveraging sponsor listings to reach more customers.

In addition, they are integrated the revenue management system with the Groupon platform. So that they can dynamically price each of their groupon campaigns. This has led to a big impact through year to date gross bookings with groupon have grown over 20% versus 2019 and keep in mind that these great results are despite the merchant being impacted by labor shortages.

And excess demand this summer.

As we allow merchants to do more with US we're also making it significantly easier for them to work with us.

Merchants, both large and small are transitioning seamlessly to self service, which is quickly becoming the primary way that merchants are launching campaigns on the groupon marketplace in the third quarter over 50% of deals launched in North America were done via self service.

To put the progress we've made into perspective in all of 2019, just 8% of our deals were launched via self service in North America.

So service adoption is even higher among our smaller merchants, who launched approximately 80% of their deals via self service in the quarter up 20 percentage points from the second quarter.

We are also striking new partnerships that we believe will enhance our merchant value proposition and help accelerate our progress.

Earlier this week, we announced a new U S distribution partnership with Google pay which will give Google pay mobile app users direct access so unique local experiences available in the groupon marketplace.

We expect this partnership to be in market in the first half of 2022.

The new partnership will expand our ability to help merchants reach new customers and also make it easier for more customers to tap into the thousands of local experiences available in the groupon marketplace.

Our goal with partnerships like Google pay has to bring more demand to our platform or bring our deals to platforms, where more customers are in an effort to increase purchase frequency.

If our 2020 customer base, but just one more groupon annually that would amount to a $1 billion of addition of billings.

Beyond our current customer base partnerships like this one with Google pay have the potential to meaningfully expand our customer reach over time.

And today, we announced an exciting new partnership with square and important local commerce player that allows local merchants to easily create groupon campaigns directly from the square app marketplace and leverage the booking capabilities a square appointments with their groupon campaigns.

This partnership is a great example of how we're attacking opportunity to bring more high quality bookable inventory to the groupon marketplace and reduce merchant acquisition costs that are still we believe this partnership will help merchants attract new customers.

We are excited to partner with market, leading brands of square in Google play and we look forward to exploring other ways to provide our merchants with a full service platform that they can leverage to build and grow their business.

With the foundational elements of our merchant value proposition and expanded supply in place we are leveraging our new customer experience and strategic marketing investments to expand the perception of our brand from an episodic inspirational marketplace to a destination marketplace.

Earlier this year, we launched a new customer experience that is grounded in helping customers engage more meaningfully with local inventory.

Our goal is to deliver more modern engaging personalized discovery experience that will give customers highly relevant search results and recommendations.

While there has been just a few months since we fully scaled or new customer experienced in North America. We've had a number of Oems bounce rates continued to improve customers are spending more time browsing and exploring our local experiences and customers are telling us that they are more likely to make a purchase on groupon than they were prior to the launch of our new CX.

While we're proud of what the team has accomplished in such a short period of time with the new CX. We're just getting started there.

There's lots of opportunities to optimize the customer experience and we expect to rollout more enhancements to further personalize the customer journey and drive repeat purchase frequency in the months and quarters ahead.

Along with our CX marketing is playing a pivotal role in driving demand.

And recovery began to take hold in North America. This spring, we leaned into marketing to maximize the impact of our progress and in the third quarter, we began to strategically invest in both mid and upper funnel campaigns to drive consideration and awareness.

We launched our grab life by the Groupon brand repositioning campaign began influencer campaigns to expand our audience and reach a younger demographic and rolled out our new blog digest to inspire discovery.

With this move up funnel, we've got signal, but we were able to bend the perception of Groupon. Following the launch of our grab life by the Groupon brand campaign, we saw the most significant improvements to our brand perception.

<unk> in quite some time.

And we saw a lift in several key metrics such as consideration likelihood to recommend and purchase intent.

Over time, our goal is to take a full funnel approach as we believe we can make all parts of the funnel work harder and unlock growth.

So let's move on to demand.

Our improved merchant and customer value proposition is working together to unlock demand.

I told you earlier that in order to drive growth, we believe we need to increase purchase frequency and unit velocity in our marketplace.

One part of our thesis is that by unrestricted deals customers would make more repeat purchases.

In the spring of this year, we began working with our merchants to make their deals repeatable and as of today's call 75% of our North American dealer inventory is now repeatable and we're on track to hit our goal of 80% by year end.

At the same time, we started our work to take <unk> from being an inspiration only site to a destination marketplace for customers. We are told customers that not only do we have more of a selection that you want but will allow you to buy the experiences you love through Groupon again and again.

And our thesis is proving correct.

Since we began unrestricted deals in North America in April we've seen a 7% lift in units per customer for approximately 700000 customers, who have purchased local unrestricted deals compared to customers who purchase restrict deals.

Keeping in mind that these results are from an early cohort. This is a big deals and signaled that our strategy to drive purchase frequency is beginning to bear fruit.

We still have more work to do to unlock the demand side of our marketplace, but this early win gives us a signal we need to scale other demand initiatives.

For the last 10 years customers have been told that they could only buy a deal once a coupon. So we are focused on reeducating customers to make sure. They are aware that they can buy and buy again with your bonds.

In the fourth quarter, we are rolling out a broad awareness campaign, which prominently feature by it again banner's throughout the customer journey and we are launching more targeted campaigns to customers who have already purchased repeatable deals.

We are also exploring ways to leverage proven marketplace merchandising tactics to drive unit growth and the team is hard at work laying the foundation to successfully scale multi packs and eventually bundles in 2022.

As you've heard we've made important progress on marketplace supply. We believe we are well positioned to accelerate demand in 2022 and beyond.

With that I'll turn the call over to Damian to provide insights on our financial performance.

<unk>, let me provide a few words of introduction.

Damian he has been a strong leader during these nine years on the Groupon team and has extensive experience in many areas of our global finance organization as well as significant knowledge of our business history and opportunities I have worked closely with him throughout my career Groupon and I look forward to partnering with him as he takes on the role of interim CFO.

Damian.

Thanks, Darren and thanks to everyone, who is joining us today.

I'll use my time to provide further insights into our third quarter operating and financial results and our updated 2021 financial guidance. In addition to my prepared remarks I encourage you to review our slides, which contains additional detail on our outlook for the remainder of the year.

Starting with our consolidated third quarter results, we delivered $553 million of gross billings of $214 million of revenue.

$181 million gross profit and $35 million of adjusted EBITDA, We ended the quarter with $477 million in cash we.

We continue to make progress rebuilding our North America local customer base, we grew our active local customers for the second consecutive quarter and nearly 90% of our new customers in the third quarter were high value mobile only customers. This resulted in 4% quarter over quarter growth for active local customers, partially offsetting the <unk>.

Decline in our lower value goods customers during the quarter.

While our total North America active customer count came in slightly below our second quarter balance everything that we're doing both for the merchant and the customer is aimed at building a stronger more valuable customer base, we're focused on growing our high value local customers and unlocking purchase frequency to capture more customer wallet share.

And drive more demand to the Groupon merchants.

Within international markets acted customers have not yet stabilized given the more prolonged COVID-19 headwinds there.

Next I'll provide more insights into our third quarter results.

<unk> with our segment and category results as we expected trends hasn't been linear and recovery continues to ebb and flow of certain verticals and countries starting with North America local billings were 62% of 2019 levels during the quarter.

Looking at the trajectory intra quarter local billings as a percent of 2019 levels pulled back in late July with the emergence of the Delta Varian and.

In international local billings for the third quarter were 47% of 2019 levels on an FX neutral basis of 600 basis points versus the second quarter.

And as we said before we continue to expect a longer recovery cycle and international.

Our third quarter global local gross profit benefited from $19 million of variable consideration from unredeemed vouchers that were sold in a prior period. The majority of this benefit was related to our international segment. We continue to observe redemption rates that were lower than our historical estimates for voucher sold at the onset of the COVID-19 pandemic.

That said, we are encouraged that redemption rates for bookings in recent periods has improved and we expect variable consideration to decrease meaningfully in the fourth quarter. I would also note that we've invested some of the favorability related to variable consideration into marketing in order to engage consumers more broadly.

Moving to our goods category performance here came in as expected goods continues to face known challenges, including the impact of ILS updates as well as competitive dynamics, which further supports our emphasis on the category.

I'm pleased to report that the international goods transitioned to a third party marketplace model, which we began in the second quarter and approximately 85% complete and expected to be complete at the end of the year.

Similar to North America. This greatly simplifies the operations of our goods category and allows us to run goods with a leaner cost structure.

As a reminder, in the third party model, we recognize goods revenue on a net basis.

Turning to operating expenses marketing expense was $53 million of third quarter and reflects an increase in spend as we made investments in the mid and upper funnel campaigns to drive consideration and awareness.

SG&A was $119 million keep in mind as you think about the SG&A run rate on a go forward basis, we do expect normal inflationary increases such as merit and incremental expenses associated with our ongoing migration to the cloud.

Looking ahead to the fourth quarter and beyond we remain laser focused on tackling the most important priorities. We believe that we're taking the right steps announced position groupon for the long term.

In light of our third quarter performance, we are updating our full year 2021 financial guidance.

And now expect to deliver $130 million to $135 million of adjusted EBITDA for the full year, and we expect to deliver between $950 million to $975 million of revenue for the full year.

Let me provide some additional context around our updated full year outlook.

We expect loan billings to moderately increase in Q4 versus Q3, and then global billings may continue to be impacted by factors outside of our control.

Such as the level of seasonal local demand and COVID-19 impacts from merchants and consumer behavior.

Our outlook assumes third quarter performance levels for goods will continue throughout the remainder of the year and then we will complete our transition to a <unk> model at the end of 2021.

Lastly, our antennas for marketing as a percent of gross profit in the fourth quarter to remain in line with third quarter spend levels.

As a reminder, our 2021 outlook does not assume a material contribution from our growth strategy.

Looking beyond 2021, we have line of sight to continued recovery next year and shrunk conviction that we are executing the right strategy to take share in the local market. We are continuing to make progress improving our high quality inventory and we are beginning to see a positive impact on consumer demand.

I'll turn it back over to Eric for some closing thoughts.

Thanks Damian.

Based on everything we told you today I hope, it's clear that we're making substantial progress both in terms of recovery and our strategy.

We believe we are well underway to reposition groupon to deliver on the promise of being the destination for local.

We are showing customers how to do more through bond and that they can comment us for the value selection convenience they want.

Our local marketplace is simply better than it was before.

We believe increasing purchase frequency as the biggest unlock to driving velocity in our marketplace and increasing our share of wallet I am so proud of what our team has accomplished over the last 18 months.

We have the potential to drive strong long term growth and looking forward to seeing what we can accomplish.

That open the call up to questions.

As a reminder to ask a question that is star one on your telephone to withdraw.

Your question press the pound key.

These standby, while we compile the Q&A roster.

Our first question comes from the line of travel young from Barclays. Your line is open.

Great. Thanks first one for Aaron on the two partnerships that you recently announced clearly two different strategies there in terms of where the inventory ultimately steps.

On the Google pay distribution I can see the benefits of merchants to get broader reach but it would also seem that allowing a third party on more of a customer relationship outside of a groupon surface.

Do you have any concerns about that.

How should we think about potential future partnerships like this neither on the campaign. The enablement side like you did with square on the distribution side and then second one for per diem in any color on how local unit or billings growth progressed throughout the quarter versus 2019 levels and how that trended into October. Thank you.

Thanks Trevor.

So let me let me take the first one and then obviously, we'll get we'll get damien's thoughts on your second question.

As it relates to our partnerships.

Groupon is really a beloved brand.

We have customers, who have been with us for years.

And our obviously spend a lot of time and money on the Groupon marketplace as we look to extend our value propositions to our customers and merchants.

Key partnerships like Google pay and square are really important and not just important to.

Being able to drive volume through our merchants, but really.

Extending the value proposition, so with Google, we're going to be able to give users on the Google platform direct access to Groupon deals and that also as you pointed out is going to help merchants do a lot more what they want to do with Google with Groupon and then with square.

This is a chance for us to build upon what we've already done a lot of before the partnership with square is built on self serve it is built on groupon pools that we just could not have done before so now with more inventory more repeatable inventory work tools for merchants, Yes, you should expect us to do more and build on top of these partnerships.

Yes.

Yeah, Thanks, Erinn for some color or commentary on the progression that we're seeing and we saw the pullback from Delta variant late July and early August and those are the biggest impact that we felt overall, we're encouraged with what we're seeing thus far in October which did improve from those low point earlier in the summer, but keep in mind.

As you think about the rest of the quarter November December generally play a larger role in the fourth quarter, particularly as consumer behavior shifting until the gifting season.

We are cautiously optimistic about.

Unique opportunity for us to lean in here until local gifting experiences given the particularly given the disruption to the global supply chain.

That being said our guidance does contemplate an increase in billings quarter on quarter, but our overall fourth quarter outlook does reflect the uncertainty and volatility created by Delta.

Thanks for the question.

Great. Thanks, guys I appreciate the color.

Okay.

Once again Thats star one to ask a question.

Okay. Let me let me go ahead and then also add just for Travers question to put it in broad context here because the partnership that you asked about I think are important in the broader context.

For our customers for our merchants for 10 years, we've been one thing and now what you've seen for Groupon.

Over the last potentially year and a half is significant changes we've completely opened up our merchant value proposition.

<unk> into self service, which you've seen huge merchant adoption more inventory options, which again, you've seen significant adoption by our merchant and now beginning of course with our customers' ability to buy and buy again. These are profound changes, which is not have been possible with the old business model and so you see real proof points coming through.

With merchant you see them trusting more and doing more why either things that they expect from a marketplace and have long asked for from coupon. That's why you see the significant uptake in each of the different components and now with customers you see customers start to vote with their wallets that 7% lift that we share in those 700000 cut.

<unk> engaged in a repeatable inventory is a really significant deals. This is customers boating thing we wanted to do more with groupon and they're starting to understand.

It's not just about changing the inventory what about changing their perception, which is why the changes we made to the CX and our marketing were so important.

Finally.

Trevor asked about the.

Partnerships you can also see partners leaning in from both sides in the region was asked why is because of the uniqueness of our inventory our inventory is something inventory that nobody else has and when it shows up in the Google play App that is special for them and then for these merchants that are on square, we've given them an easy way to tap into groupon demand now.

Talk to a ton of merchant.

There's many of them they know that they can't get this type of demand anywhere else. So for us we see the opportunity as large we're making a ton of progress. These are big changes in a short period of time and you should expect us to continue to scale. These wins more broadly in the business and the benefit build on itself.

Do you have a question from Yigal <unk> from Wedbush Securities. Your line is open.

Hey, this is Chad on for Yigal.

Quick one on partnerships.

Sure any of the economics around them and how those work and then.

Any color you can give.

The rollout of inventory scaling beyond the end of the year when we can see it in more verticals and internationally.

Yes, I think thanks for the question.

Sure the partnership economics, but you should understand it.

Our goal here is in distribution, we're looking to lower our merchant acquisition cost by making things of course easier for merchants and on creating new merchant acquisition channels for ourselves and likewise similar on the customer side is the way we're thinking about these partnerships.

Extending our value proposition off platform.

And I'm, sorry, and your second question.

Yeah, just just on the inventory scaling any update beyond the end of the year here.

Spending into new verticals and internationally.

Yes, so what you should expect from US is just continued.

On what we've done.

And so you should continue to expect us to continue of course to hit our goals.

We've already made significant progress on that's rolling out offers and.

And continuing to build we already have the inventory growth that we've shared in beauty and wellness.

Over 30% we're partners of course are coming out with four times as much inventory. Additionally, we shared an important data point here related to Q3 and what effectively is it.

Material, but transient COVID-19 impact, where we expect to have.

Merchants back on our platform in Q3, we believe would've made up 10 to 12 points of overall local billings that's really material.

So if you add it together both what we believe to be an extended recovery for groupon with some of these merchants and then of course, we have high confidence as our merchants that we've talked to understand the revenue management works in exactly why it went they'll be back.

The benefits of the changes to the value proposition more ways to work with Groupon more repeatable inventory. We expect these benefits to continue to build on themselves over the coming months and quarters.

And then as we continue to see recover you asked about international.

We will begin to rollout more of these features.

And business practices to our international marketplace.

Great. Thanks.

Once again, we would like to ask a question Thats star one on your telephone.

So there are no further questions at this time.

That concludes today's conference call. Thank you everyone for joining you may now disconnect.

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Sure.

Okay.

Okay.

Good morning.

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