Q1 2022 Groupon Inc Earnings Call
We encourage investors to use our investor relations website at Investor Dot Groupon Dot com as a way of easily finding information about the company Groupon promptly makes available on this website. The reports that the company files or furnishes with the SEC corporate governance information and select press releases.
And social media postings on.
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 am happy to turn the call over to <unk>.
Hi, everyone and thank you for joining us today I will use my time to talk about our first quarter results and how we intend to address our performance challenges, but reducing our cost structure and creating a more differentiated inventory offerings.
Since starting as CEO in December .
A substantial amount of time studying our business trying to understand why we have not been able to successfully translate our significant asset scale data and customers into a sustainable growth engine, let me be clear I have good news and bad news.
The bad news is that our first quarter results fell short of our expectation and did not demonstrate our potential to create value for our customers Marchand partners employees and shareholders.
In the first quarter, we didn't see local demand come back as only cross cases began to subside.
We had expected to see a pattern similar to what we saw last year in the wake of Delta.
Executed on the initiatives that reflected our expectation for increasing demand post army crop.
But this demand did not materialize.
As you know groupon as a marketplace that offers discounted experiences and services.
Merchants simply did not need to leverage the groupon marketplace as much as we thought they would coming out of the pandemic and this has been worsened by inflationary headwinds.
With demand high end capacity low merchants did not meet <unk> discounted inventory on our marketplace.
In addition, we saw merchant availability contribute to driving the refund rates Hyatt, which put further pressure on our inventory levels as well as adjusted EBITDA.
While we think this is transient youre going to hear us talk about our plans to make groupon more helpful to margin throughout the economic cycle.
The good news is that we have a plan to address the drivers behind our shortfalls this quarter and grow the business for the long term.
Two key areas that we need to improve.
We are moving quickly to address it.
<unk>.
We need to improve our expense structure substantially and we intend to do this fast.
Our streamlining of our technology platform and our operating processes.
By doing this we believe we can deliver our full year adjusted EBITDA margin in the 15% to 20% range and generate a minimum of $100 million in annual free cash flow starting in 2023 seconds.
In order to grow our top line, we need to offer more differentiated inventory.
I will explain our marketplace needs to give customers a well rounded interaction that includes a great selection of experiences and services.
You have price points.
Today, you will hear me talk about two innovative ways that we plan to expand our inventory curated inventory collections.
The launch of beauty and wellness marketplace that offers premium experiences.
So, let's talk about how youre going to get this done.
Starting with our expense structure.
Spend a lot on our tech platform.
In fact, we devote about 40% of our overall cost structure to technology.
This translates to about $210 million per year.
We have a legacy platform that was built in 2010, and we need to streamline it to meet the current needs of Groupon.
Over the past 10 years, we created a set of assays to handle just about every nuance.
And the start of the dead right about 700 services operating behind our platform.
This is way too complicated and big for our needs and size.
Our move to the cloud.
Really highlighted the cost associated with this legacy technology platform.
Our cloud cost per transaction is well above levels has seen my previous experience I believe we can generate meaningful cost savings.
Streamline our platform to serve our current needs and cut out any non essential services that don't need to be migrated.
Next.
Many of our processes required human touch.
And this is not scalable.
Our sustainable if you want to grow the company.
We are looking at all our processes to reduce cost. So let me give you a quick example.
We can do more to scale our solution automation features and.
And allow merchants to join our marketplace without human touch.
We have done a good job of increasing the number of merchants and listings that onward to sell side of it.
But we have many other opportunities to go beyond just onboarding.
This should lower our costs related to serving our merchant partners.
We also need to streamline other associated infrastructure processes.
This work is now underway.
There are many other examples but what I want you to take away from this conversation.
We are moving aggressively towards automation.
And we're doing this across our entire organization.
We expect this to both increase productivity and reduce our cost.
As we March towards automation, we believe we can also build a financial model that has a lower.
Fixed cost base.
This will allow us to be more nimble as demand ebbs and flows next we need to drive topline growth in our marketplace into a new era.
What do I mean by this.
We need to become a marketplace for us.
Okay Jim.
This means that customers today are looking for one trusted marketplace, where they can find all local services and experiences they want.
A place where it's.
Easy to transact and interesting to payouts.
These shoppers are not always as price sensitive.
So theyre not always searching for a deeply discounted deep.
But Dave do you want to create value.
In order to be this marketplace solution, our inventory needs to be highly differentiated. So we are going to work on expanding our inventory in two important ways uniquely curated collection and a stand alone marketplace experience for premium beauty and wellness experiences.
In both cases, our goal is to deliver its unique inventory that customers can find elsewhere.
We already have a broad spectrum of deep inventory on our core group of our marketplace.
But our offering is not always differentiated enough to be compelling to consumers.
This is regulation comes into play.
Create package inventory listings that combined experiences and services unique new rates. These collections this span a wide range.
Date nights, which might include a dinner and a fantastic Italian restaurant and a night out barley that is packaged and sold as one listing are really they gets faster that could bring together a great Museum experience and frankly, Bob for example.
We believe we can create unique experiences that will appeal to existing and new customers alike across a variety of demographic groups.
And only group that has the breadth of transactional inventory to offer these packages.
Whether there is a deep discount does not the value of package inventory is that is unique to group up.
Making us the destination for <unk>, while meeting the intent that customers have when they're searching for things to do on any given day or not.
I believe that this unique inventory will wow, our customers. This approach will give more value to merchants partners that groupon gap by just being a destination for deeply discounted inventory.
So inventory deterioration will be an important tool that will leverage to drive customer engagement and growth.
<unk> is only one part of our inventory of Fortuity.
With the tremendous set of assets. We have we believe we can create even more value for our stakeholders by launching.
Our beauty and wellness app that will stimulate both sides of our two sided marketplace.
I have done something similar in my career.
So let me take a few minutes to give you an example.
Zappos was able to attract a variety of popular brands.
But needed to bolster its stable of premium brands.
So we created a new experience that could live side by side with core experience.
<unk> built a website where customers are looking for premium brands could be saved.
And we were able to attract those premium brands to our new destination instead of at the intent of those customers.
Today at Groupon, we lacked the ability to attract meaning premium local experiences and services taller.
Solar marketplace, because we typically expect a deeply discounted mystic.
But when customers have high intent, they're not focused on discount the.
The discount requirement and our core groupon marketplace is constraining.
Our ability to acquire and offer the broad inventory selection.
Of our high intent customers want.
<unk>.
Hip bidding our ability to grow.
To take advantage of this a portion of <unk>, we are planning to launch a new marketplace experience dedicated to providing a great local selection that is not all on the desktop.
Our goal is to introduce this marketplace by the end of this year.
We will start with beauty and wellness services and experiences trust will be the cornerstone of this new marketplace offerings.
Consumers will know that they can trust coupon to deliver premium experiences from quality merchandise and that debt purchase to redemption process will be seamless.
We will offer a curated marketplace experience with cutting edge functionality and new Standalone Bradley.
And we intend to do this by leveraging our improved technology infrastructure and platform.
To paint the picture of what we expect this new experience to offer.
Consumers will receive best in class customer service content and price transparency.
We also plan to explore options to offer financing for high end services, such as cosmetic surgery.
As many of you know in the beauty and wellness industry is a large and growing market and we believe we are well positioned to capture much greater market share with this.
We expect this experience to be truly unique and to be attracted to our high intent customers.
Best of all.
This will be complementary to our core groupon experience.
And with nearly 100 million unique visitor sessions per month.
We intend to move customers between our two website properties as intent dictates.
I knew that when I took this role mistakes would be high.
Borrower bit Archie.
That the reward for success would be very compelling.
So far my journey has met my expectations I have discovered some things about the business that that didn't expect and some things we are in line with my expectations.
But everything I have seen is something I've seen before.
Last quarter I talked about the untapped assets that make groupon opportunity so attractive.
Our global scale and the platform large customer base and actionable data.
Believe that these assets coupled with a more innovative approach to leveraging our unique inventory position us to grow our business for many years to come.
If you add this growth potential to reduce cost structure and a strong balance sheet that includes our investment in semi.
I think you will agree with me that coupon is well positioned to create shareholder value.
We look forward to sharing our progress with you as we work to create the value our stakeholders deserve.
With that I will turn the call over to Damian to cover financial performance.
Thanks, Kate and thanks to everyone, who is joining us today.
Use my time today to provide further insights into our first quarter operating financial results, our financial outlook for the second quarter and full year 2022, as well as some thoughts on the potential of our long term financial model in.
In addition to my prepared remarks, I encourage you to review our slides press release, and 10-Q, which contains more detail on our Q1 results and outlook.
Starting with our consolidated first quarter results.
We delivered $461 million of global billings $153 million of revenue $134 million of gross profit and negative $7 million of adjusted EBITDA, We ended the quarter with $403 million in cash, including $100 million drawn on our revolver.
The first quarter, our business did not rebound as expected once the omicron bearing abated. However, as <unk> mentioned in his prepared remarks.
Laser focused on two areas fixing our cost structure and building a more differentiated inventory offering through curation and a new dedicated premium beauty and wellness marketplace.
So let me walk you through our first quarter results business drivers and trends.
Starting with our local category as.
As we discussed on our last earnings call, we had anticipated local performance to be significantly impacted by <unk> in the first two months of the quarter. When Covid case counts were at or near all time highs.
Also expected to see the category begin to rebound in late February and into March as restrictions in mass and these were listed in case counts began to decline.
This would be a pattern similar to what we had experienced with prior COVID-19 waves.
However, we saw local performance stall out in the beginning of March and educate our mentioned elevated refunds.
In North America, local billings recovery rates were down 15 points versus the prior quarter and were at 50% for 2019 levels.
And in international local billings were 48% of 2019 levels sequential decline of four points versus Q4 2021.
We ended the quarter with approximately 22 million active customers worldwide.
Within our North America customer base, we had 11 million active local customers in the first quarter down slightly compared to the prior quarter.
As a reminder, our active customer metrics or trailing 12 month metrics in the first quarter, we observed a decline in some period local purchasers.
Within our international markets, we grew our active local customers, 8% sequentially versus the prior quarter and 31% year over year and as a result at $4 9 million active local customers in the first quarter.
This growth in local customers, partially offset the decline in our lower value goods customers during the quarter.
Moving to our goods category in.
In the first quarter billings were at 22% to 2019 levels, which was below 30% recovery level, we expected to achieve as a reminder, we completed the international goods transitioned to a third party marketplace model in the fourth quarter of 2021, which means we recognize goods revenue on a net basis turning to operating expenses.
G&A was $126 million flat versus the prior year and lower than we anticipated.
We remain prudent with our spend during the quarter and were able to fully offset both wage inflation and incremental expenses associated with our migration to the cloud.
Marketing expense was 39 million in the first quarter or 29% of gross profit, which is in line with our investment in the prior quarter and historical averages.
While we intend to take advantage of opportunities to leverage marketing to accelerate our growth over time, we expect to reduce our marketing spend for the rest of 2022.
Turning to our cash position in the first quarter, we saw cash outflow of $96 million we.
We typically experienced net working capital outflows in the first quarter due to seasonality and a normal merchant payment cycles.
Net working capital was also impacted by lower sales volume and corresponding cash inflows given the more muted state of our local recovery.
Our liquidity position remains solid and we have a balance sheet that provides us with the financial flexibility to withstand the impacts of COVID-19 and invest in opportunities to drive long term growth.
We ended the quarter with a cash balance of $403 million, which includes the $100 million drawn on our revolver.
Now I'll take you through our outlook for the second quarter and full year 2022.
In the second quarter as a percentage of 2019 April local billings have been trending in line or slightly better than what we reported for the first quarter.
Based on this we expect to deliver $155 million to $165 million of revenue in zero to $10 million of adjusted EBITDA.
For the full year 2022, we expect to deliver $670 to $700 million of revenue and $60 to $80 million of adjusted EBITDA.
Our updated guidance reflects a more muted recovery outlook than our prior guidance given what we've observed year to date at the low end of our guidance range. We are assuming local recovery rates in the back half of the year, we improved modestly versus current recovery levels and.
And at the high end of our range, we are assuming local recovery rates in the back half of the year more in line with the second half of 2021 keep in mind that our financial guidance for the year does not include any benefit from our new growth initiatives turning to expenses, we expect marketing as a percent of GP to be in the low 20% range.
And we intend to continue to manage SG&A closely despite the increased costs related to wage inflation and migrating to the cloud we expect to hold SG&A expenses flat to slightly down versus 2021.
For your models, we expect our expenses associated with migrating to the cloud to be approximately $35 million in 2022.
Finally, I wanted to provide you with a few insights on cash flow.
The cash outflow in the first quarter and our expectations for the second quarter, we no longer expect to generate cash for calendar year 2022 that said as a recovery picks up momentum and our operating initiatives begin to drive impact we expect to return to cash generation in the fourth quarter.
Before I turn it back over to Kate <unk> and wanted to take a step back and provide some thoughts on our long term target financial model, which we believe can deliver significant value to our shareholders and other key stakeholders. We believe we have a number of undervalued assets. So we can leverage to drive value creation. Let me remind you of a few key points first let's look.
At the Big picture, we have built a global two sided marketplace with tremendous scale that generated more than $1 6 billion in local billings in 2021, we have brand recognition that extends to consumers around the world and we have nearly 16 million active local customers and second we also have a strong track record of prudent cost control and have to take.
More than $225 million of expenses out of our P&L compared with where we were in 2019.
And as <unk> outlined today, we believe we can streamline our tech infrastructure and automate many processes to unlock further cost reductions and drive efficiencies across the business.
With these financial drivers, we believe we can sustainably deliver full year adjusted EBITDA margin of 15% to 20% range and generate a minimum of $100 million in annual free cash flow starting next year looking.
Looking at all of these assets combined with our balance sheet that includes our investment in sum up and our new strategy. We don't believe our current market cap reflects the value. We believe we are unlocking.
Net net we believe we are well positioned to create value for all of our stakeholders.
And with that I'll turn it back over to Kate for a few final prepared comments.
Thanks, Damien to be clear, we have a lot of work to do but im confident that we have the right resources to make rapid progress.
Our entire organization will be focused on the most important work improving and reducing our expense structure to deliver a strong adjusted EBITDA margin and free cash flow as we are investing in future growth.
Growing our marketplace offering more differentiated inventory.
Through curated inventory collection, and a new vertical marketplace.
Premium and beauty and wellness experience. We believe success in these two areas will allow us to achieve our financial goals and position groupon to grow in a while.
Right.
<unk> cycle.
With that I.
I'll turn it over to operator for your questions.
Thank you to ask a question press the star key followed by the number one on your Touchtone phone once again Thats star one to ask a question.
Your first question comes from charter Yang of Barclays. Your line is open.
Great. Thanks, good or this feels like a bit of a reset some user experience work to be done some improvements and getting the right breadth and depth of inventory of new beauty and wellness marketplace experience. This year, all of which would seem to indicate some additional spend is required from here to get those components right.
It feels a bit opposed to the goal of meeting to take further cost out. After the company has already taken out upwards of $225 million and run rate savings. So just help us understand how you're thinking about balancing the cost reduction versus needing to spend on some of the retooling that youre, indicating.
Good evening and thanks for asking the question.
I think overall, what we have is when they look at all our cost at the moment. Some of these particular cost are.
<unk>.
Well put it internally built equations when I look at it from my perspective, when I look at it some of these particular cost on these necessary. During the platform are these cost actually add on to our current customer experience. Those are not required. So that's where we are taking a look at.
Both our technological platform to see is this platform actually selling our need and is this going to be this large that we need to continue a bit.
The answer to that is no and so we are going through each of those questions and reinvesting some of that particular.
Economic costs back into building. These particular, new marketplaces is where we are going to be focused op.
That's helpful and Damian one for you if I may.
What gives you the confidence around those 2023 goals the $100 million in free cash flow in the 15% to 20% EBITA margin and just Relatedly can you walk us through some of the moving pieces in terms of like take rate gross margin and key opex lines to bridge to that 15% to 20% margin bogey.
Yes, sure thing Trevor and thanks for the question, providing this framework and long term target financial model is really aimed to kind of answering your first question to Kate are there around how we're thinking about generating profit.
Bottomline profitability.
For the company and this framework is really around how we intend to operate going for net of all of those investments.
Marketing sales tech and G&A.
As we get closer in 2023 and will definitely provide you with more details on the specific P&L line items, but what I can share at this time is that we're confident we can achieve this type of financial profile or just nominal change in our revenue. Some of that is because of those cost opportunities that we do see and why we wanted to disclose our.
And the cloud that we don't see recurring in 2023.
Great. Thanks for that David and just one last housekeeping one was there any change in the carrying value of some uptake in the quarter I think that yours are detailed in the 10-Q, but I don't think thats out just yet.
Yes, no change there Trevor.
Great. Thank you both.
Your next question comes from the line of Mike.
Of Goldman Sachs. Your line is open.
Hey, good afternoon, and thank you very much for the question I was just wondering if you could talk a little bit about your.
Your confidence level in the second half recovery.
Just given how.
April is pacing and are you assuming.
A continued recovery into 2023.
I was just wondering if you could offer any thoughts around.
Customer count and whether or not you expect any stabilization. This iridex. Thank you.
Mike I will address the first one regarding the.
Our confidence.
Now the prelim progressing until basically stabilize or better than what we had seen in March and in general.
For the back half of the year I think we have.
What we are putting out is a number that is scenario based number.
Based on what we have seen that okay last year, there were some scenarios, where we actually went up because the COVID-19 recovery.
It was more.
I would say spikes in and out there.
They are coming in and out.
This year, we don't expect that sort of spike.
Spike it equally or it's more of a smooth line car is what we will expect for the rest of the year and Thats, where we our scenario equation is based on now.
Now as far as a customer.
Customer interaction customer counts have concern we believe that if we can continue to deliver on the value, but I think generally we are targeting our Q3 to go back and say Hey, we will have this differentiated collection launch in Q3, we should see a much better response from customers.
Yeah.
Starting with Q T.
But.
That will get much bigger traction Q4, as well as in 2020.
Great. Thank you very much for the thoughts Qatar.
To ask a question press the star key followed by the number one on your Touchtone phone.
Once again Thats star one to ask a question.
Your next question comes from the line of drilling.
Your line is open.
Hey, good afternoon, everyone.
Let's start on the trends in the recovery.
Just want to understand a little bit better.
As we noted March rebounding, what you expected.
Sure.
You mentioned the high demand and low availability. It sounds like you were surprised by that best within your Skyfall last year as well so and then.
Well, if if that is the case right now.
<unk>.
Why do I expect that that gets any better as we work our way through the year and presumably.
Demand continues to get stronger or does the availability to get better.
Labour factors can you just walk us through.
The expectations.
Around those puts and takes a little bit more.
Thanks for the question.
I think one of the things we got to look into it what are the inputs right. So the inputs last quarter, we had delta.
Last year, we had delta and then before that whenever Covid hit two months later, we started to see the customer demand mode as well as much in demand.
Oh, we want to bring.
That we want to come back to Groupon platform come back real fast now this whole time, what is happening is that merchants have the ability to raise the prices to meet their goals in that particular case.
I don't need to discount as much because their capacity to serve these particular customers is lower.
But they can meet their.
<unk> financial goals by selling lower number of customers that was very different from it happen and.
Earlier Covid recoveries. The second part is also customers are looking for these some of these particular mark trends, which are differentiated experiences are which have differentiated quality. These particular merchants. They are not looking for those specific set of merchants on groupon platform because that.
Expectation is im ready to pay I'm, just going to go and pay that instead of trying to get more discussed both of these two combinations made it difficult for us to see the kind of recovery you're expecting in March.
Go forward. The Bse is that we are trying to build this particular curated collections as I talked about that one and then along with that and you can also see that.
Our <unk>, we are very focused on that one to get back on our platform to say hey, what are the ways. We can get this particular Avalon back on the platform looking through things such as.
What what sort of inventory density we need to have on the platform what sort of margins, we need to bring back on the platform. Instead of just looking for hey, we need to be focused on this amount of margins. We can say, it's okay to have one or two milestones, but we just need to make sure that they have availability so thats.
Part of our input as opposed to just say X number of merchants need to be back on the platform. We are making sure that the quality is.
And quality not just merchant quality end to end customer quality is also consider while we bring back the supply and Thats. What gives me confidence that it's going to be better in Q3 Q4.
Okay. So maybe let's talk about the new marketplace.
And the kind of bundled.
Curated offerings.
Okay.
Can you just talk talk through the.
Process, how are you bundling.
What does that what does that involve or does it require and then on the new App, maybe just more details.
The brand so groupon.
How are you going to get the kind of zero to 60 in terms of inventory on that it sounds like it's going to be a completely different experience.
Let me just share some more color around that.
Yeah definitely I think the first one essentially what we are trying to do here is the experience starts by saying what are the things you can bundle together are.
What are the things that are collected our experience together.
So it is the process. We are starting is in house by creating these particular collections manually looking at the pattern what works and then scaling those up independent different geographies.
Thats one so the capability. We are building right now is to combine these particular experiences together such that they actually makes sense for our customers and we even had the traction as we go along.
Said Q3 is the time the.
Second the differentiated marketplace, it's going to be completely bang.
<unk> brand and the reason it is different brand is because the expectation from a different brand.
Differently. The current whenever you start something that the Groupon brand. The first set of expectation customers. How is it will be discounted.
That's not what this new bandwidth standpoint, the new brand with stock it will be starting with trust that means you will have the price transparency you will have the convenience transparency.
And most important of all you will have the much richer content in this particular experience.
Three things make this particular band completely different and the setup merchants a setup actually much and partners that we can onboard on this new brand will be completely different because.
They are frankly trying to businesses that sells in some cases from desktop.
And then taking this new brand and actually pouting.
Customers that we know are not always looking for discounts gives us.
Really good advantage to start.
And get this particular brand powered up with the right set of customers.
This is something we only can do given that the scale, we have $15 million of local customers and I think this premium band actually completes the hole.
<unk>.
Good mood of collections in terms of discounted slash premium inventory versus right now we are stuck.
With Hey, we have to have the discounted inventory and you cannot have anything. So we are focused on local this gives us the ability to sell our local instead of only discounted logo.
Thanks, if I could squeeze in one more quickly Damian you mentioned.
The shares are undervalued.
Cash flow this year.
I mean, maybe not negative but certainly.
Positive as you're calling out you're expecting return to.
Good amount of cash flow next year, just how you think about capital allocation and buybacks given maybe those two things together.
Okay.
Yes. Thanks, Thanks for thanks for the question.
We're laser focused on realizing the opportunity in front of us and drive one stabilizing fixing our core platform as well as unlocking some of these growth vectors that Keith mentioned.
You mentioned.
Playing out some of that scenario all the way into 2023, we're looking forward to return into cash generation later this year in the fourth quarter as I indicated in my prepared remarks, but then also putting out that type of cash free cash flow generation on a sustainable basis going forward and that's really the key for us to think about capital allocation.
<unk>.
We need to be delivering that free cash flow on a sustainable basis. I'd also say part of the reason for calling out and a reminder, on our sum up investments can be an important shift for us to monetize and address capital allocation going forward for us too.
Okay. Thank you.
To ask a question.
Our key followed by the number one on your Touchtone phone once again Thats star one to ask a question.
As there are no further questions.
With that this concludes today's conference call. Thank you for participating.
You may now disconnect.
Okay.
Okay.