Q1 2023 Groupon Inc Earnings Call
Speaker 1: I.
Speaker 1: And.
Speaker 2: our interim CEO Dushan Sinkival and CFO Yeri Plummert. At this time all participants are in a listen-only mode. A question and answer session will follow the company's formal remarks. To ask a question please press the star key followed by the number one on your touchtone phone. Once again that's star one to ask a question. As a reminder today's conference is being recorded.
Speaker 2: Before we begin, Groupon would like your mind listeners that the following discussion and responses to your questions reflect management's views as of today May 10th, 2023 only.
Speaker 2: and we'll include forward-looking statements.
Speaker 2: As a result, may differ materially from those expressed or implied in the company's forward-looking statements.
Speaker 2: additional information about risks and other factors that could potentially impart.
Speaker 2: Our impact, the company's financial results are included in their earnings press release and their filings with their FVC. We encourage investors to use Groupon's Investor Relations website at investor.groupon.com as a way of easily finding information about the company. We encourage investors to use Groupon's Investor Relations website at investor.groupon.com as a way of easily finding information about the company.
Speaker 2: Rupon promptly makes available on this website, the reports that the company files are furnished with the SEC, corporate governance information, and select press releases and social media postings.
Speaker 2: On the call today, the company will also discuss the following non-GAAP financial measures, adjusted EBITDA, non-GAAP SGNA, free cash flow and FX neutral results.
Speaker 2: In Groupon's press release and their filings with the SEC, each of which is posted in their investor relations website, you will find additional discloses regarding these non-GAAP measures, including reconciliations of these measures to the most comparable measures under US GAAP. Unless otherwise noted, all comparisons are provided on an FX neutral basis.
Speaker 3: And with that, I'm happy to turn the call over to Dushan. Hello and thanks for joining us for our first quarter 2023 earnings call.
Speaker 4: It's a pleasure to be with all of you. In addition to today's prepared remarks, I encourage you to review our shareholder letter, press release and 10Q which contain more detail on our Q1 results.
Speaker 4: I learned during my first days at Groupon.
Speaker 4: strategy that our team is executing on to address our challenges and make the most of our opportunities.
Speaker 4: Third, the highlights of our Q1 performance and lastly our outlook for 2023.
Speaker 4: Before I get started, I would like to briefly introduce myself. I am an entrepreneur by trade and I have created several global e-commerce and technology products used by more than 250 million users. I built Ippo Isteni CZ and Netbrokers Holding, a domain arm syntax player with more than 400 employees which was bought by a German...
Speaker 4: an entrepreneurial investment firm that has grown rapidly to approximately 1 billion in the net asset value and is currently Groupon's largest shareholder, with ownership of approximately 22%.
Speaker 4: Its private equity portfolio includes almost 30 companies, including several marketplace companies.
Speaker 4: At Palfire, I served as a Chairman and CEO and was responsible for leadership, strategy development, organizational design, go-to-market and product development.
Speaker 4: Pellfire also has a track record of successful transformations, including its investment in Alcro, which is central and Eastern Europe version of eBay.com, which increased the G&V by 2.4 times in 3 years.
Speaker 4: while maintaining healthy profitability.
Speaker 4: I am really proud of the approach we developed at the PaleFire to drive business transformations and I am excited to bring my experience to help lead Groupon.
Speaker 4: Now, the reason I am telling you this is that my experiences make me what I am today. You will find me a leader who keeps things simple, keeps customers at the center of everything, short-term impatient and long-term patient, is not afraid of challenges and determined to beat them.
Speaker 4: During my first 40 days as a CEO , I've listened to and learned a lot from our employees and our partners.
Speaker 4: I immerse myself into our products and technology, into our value proposition and into how we meet the market's needs.
Speaker 4: Through all of these conversations, I've been struck by the opportunities we have internally to operate in a much more efficient and productive way.
Speaker 4: We can generate much higher output with the same or even lesser sources. My initial focus is to execute on these opportunities so that we have a solid base for future growth.
Speaker 4: I also acknowledge that we are facing challenges that we need to address and that you are all looking for responses from us.
Speaker 4: We recognize that turning our business around is going to be tough and that it won't happen overnight. This requires a focused transformation and requires that we leverage all of our assets.
Speaker 4: We have developed our transformation strategy by drawing inspiration from the principles of building a successful Internet marketplace.
Speaker 4: b. Automate Groupon at past success c. Groupon clone in the Czech Republic which successfully completed its transformation from a daily deal discount flash site to a destination experience marketplace.
Speaker 4: Our transformation plan is built on eight strategic pillars that will provide focus, organize our teams and drive momentum.
Speaker 4: These are first, fix the supply side of our marketplace.
Speaker 4: Second, raise our product experience to modern marketplace standards.
Speaker 4: Perk, tune our marketing engine towards lower funnel performance channels.
Speaker 4: 4. Assemble a high-performance team with a focus on operational excellence.
Speaker 4: Fifth, rebuild our organization structure, business processes and management systems.
Speaker 4: 6. Create an efficient cost structure 7. Leverage our business lines to support local 8. Improve our financial flexibility
Speaker 4: Each of these pillars are detailed in our shareholder's letter, but I will say a few words on each gear one by one.
Speaker 4: Firstly, fix the supply side of our marketplace.
Speaker 4: Everything starts with supply. If we vendor I supply, demand will follow.
Speaker 4: Our plan to fix the supply side of our marketplace involves.
Speaker 4: re-inverorating our merchant value proposition, returning to geo-focus and recommitting to a sales-driven marketplace. Groupon needs to improve its value proposition for merchant partners. As its current approach of heavy discounts and expensive deal margin structure has led to increased churn of its supply base.
Speaker 4: To strike a better balance between consumers, merchants and Groupon, the company aims to offer more flexible and dynamic partnership solutions that meet merchants' individual needs and marketing goals. This process will take at least 12 months to transition and achieve the right balance. Groupon is refocused on a geo-targeted approach to much local demand and
Speaker 4: more consistently and drive better performance as we later focused on running our marketplace at the local level. Finally, we consider our Salesforce critical for securing unique supply on our platform, but in 2022 Salesforce compensation exceeded gross profit on most of our new supply.
Speaker 4: experience to modern marketplace standards.
Speaker 4: information strategy to enhance customer and merchant partner experience.
Speaker 4: The current product offering falls short of modern marketplace standards, resulting in an unadaptive ROI despite higher source allocation. Groupon has taken steps to right-size-dote organization and increased focus on product development, including an ambitious hackathon initiative to quickly launch product improvement.
Speaker 4: such as gamification, personalization, and generative AI assisted the deal creation. Our third strategic pillar.
Speaker 4: tune our marketing engine to focus on lower funnel performance channels.
Speaker 4: In Q1, Groupon improved the efficiency over marketing spend by focusing on lower funnel performance channels and shifting away from intermentality to ROI targets.
Speaker 4: This resulted in a decrease in marketing spend as a percentage of gross profits, but gained in efficiency, especially in search engine marketing.
Speaker 4: Groupon is now focused on improving returns in performance channels before returning to mid and upper funnel channels.
Speaker 4: Our fourth strategic pillar, assemble a high performance team with a focus on operational excellence.
Speaker 4: Attracting top talent is crucial to Groupon's success and the company is seeking individuals who are detail-oriented, proactive and customer-focused. Groupon has recently hired talent through Pelfer Capital's network in the Czech Republic and is also actively recruiting both inside and outside the company.
Speaker 4: The goal is to create a winning team passionate about group-on-smission and committed to driving change.
Speaker 4: Our fifth strategic pillar, rebuild our organization structure, business processes and management systems. Groupon is prioritizing operational excellence and is making changes to ensure a strong management team and operating systems are in place.
Speaker 4: The organization is becoming flatter and leaner to enable faster execution of high priority projects, breaking down silos and implementing a performance culture with metrics and KPIs.
Speaker 4: We have also improved our management system by reducing meetings and implementing a modern project management tool.
Speaker 4: Our 6th strategic pillar, create an efficient cost structure.
Speaker 4: Group on sees opportunities to improve efficiencies through automation, simplification and implementation of AI tools to reduce costs. The company is reviewing large and small categories of spend and is on track to exit the area with a non-GAP as GNA run rate of 290 million.
Speaker 4: We believe we can improve our bottom line by implementing proper organization structure and a mindset of frugality.
Speaker 4: Our seventh strategic pillar leverage our other categories to support local.
Speaker 4: We plan to shift our merchandising strategy in goods and travel categories to complement our experiential value proposition and mission to be the ultimate destination for local experiences and services.
Speaker 4: In goods, we will offer seasonal trends and inspirational gifts, while travel will pursue experiential travel by curating packages that include attractions and accommodations.
Speaker 4: Our goal is to create a portfolio of experience offerings with bonds acquisition, retention, engagement and margin to unlock the synergy potential of our horizontal marketplace business model. Our eighth strategic pillar, improving our financial flexibility.
Speaker 4: Groupon has taken steps to improve its financial foundation through a January restructuring announcement and March amendment to its credit facility among other plans.
Speaker 4: The company believes it will have sufficient liquidity to meet its obligations in the next year and is exploring strategies to further enhance its liquidity position, such as cost savings, additional financing, and potential monetization of non-core assets.
Speaker 4: Let's now look back at Q1.
Speaker 4: We had a disappointing quota for both revenue and adjusted EBITDA.
Speaker 4: While Yezi will provide more details later, our first quarter 2023 billings in revenue were down 14% and 21% year-over-year.
Speaker 4: cash outflow of 86 million.
Speaker 4: We use the results to indicate that business is facing serious challenges that we must address as a company and underscore the need to implement a significant and urgent transformation.
Speaker 4: 2023 will be an important year. We have a lot of work to do and the results will take time. I will make sure that in 2023 we transformed the company and laid a foundation for our long-term success.
Speaker 4: As I spoke about earlier, a key objective for the long-term health of the business is to fix the supply side of our marketplace. Finding the right balance with our merchant partners will make our business more healthy and sustainable over time.
Speaker 4: within this long-term context.
Speaker 4: We took a realistic view on the 2023 business. As a result, I expect our second quarter revenues to decline year over year at a similar rate to what we observed in the first quarter.
Speaker 4: slight improvement in the rate of declines in each quarter.
Speaker 4: As our transformation strategy takes hold, we expect to see an increase in year-over-year local buildings by early 2024.
Speaker 4: Will our revenue growth trends may diverge from our local billing trends depending on the trajectory of our other categories and the timing of our transformation strategy?
Speaker 4: When I next communicate in about 90 days, I intend to provide more details to help you monitor our progress towards our priorities.
Speaker 4: I am a firm believer in transparent communication and dialogue with all stakeholders.
Speaker 4: I strongly believe in delivering on our commitment and doing what we say we will do.
Speaker 4: I will therefore strive to be as open as possible in discussions with all of you to provide regular updates on our progress towards our strategic, operational and finance goals.
Speaker 4: With that, I will turn it over to Yuzhi to provide some insights on our financial performance.
Speaker 4: But before I do that, let me provide a few words of introduction. Yuri Ponnert is a highly regarded leader, evidenced by his successful career as CFO of Alza CZAD, one of the biggest e-commerce players in Central and Eastern Europe .
Speaker 4: He brings to group on the experience and tell us that we need to help us fulfill our potential. I've worked closely with him during our time together at Pell Fire, and I look forward to partnering with him as he takes on the role of CFO .
Speaker 5: Second, Dusham and St. Cune as well to everyone who are joining us today. It's a pleasure to be here speaking with you.
Speaker 5: I believe my time today to provide further insight into.
Speaker 5: Our first quarter operating and financial results, progress on our cost-saving actions, and factors to consider for the remainder of the year.
Speaker 5: Before I begin, I would like to briefly introduce myself and share a few initial observations I had on our business. I joined Groupon less than a month ago. Before that, I acted as the Group CFO of WebArchitecting. During Q1, I helped the board with its oversight.
Speaker 5: of the major of Centauri or Pian Ecomar's players, is that there are no more of about 2 billion of US players?
Speaker 5: During my time with Groupon, I've learned that there are legacy systems and processes for the company's quick and acquisitive growth at its onset that I believe can be part of the streamline.
Speaker 5: So my priorities, apart from more focus on management and decision making, will be
Speaker 5: focus on security and cash flow management, simplification of the structure and processes, as well as direct alignment across departments and automatization of processes.
Speaker 5: So, let's jump into the consolidated first quarter results. We deliver 396 million of gross billions, 122 million of revenues, 105 million of gross profit and negative 5 million of adjusted EBITDA.
Speaker 5: First quarter pre-kiss outflow was 86 million and we ended the quarter with 164 million in cash, including 28 million in the run on the revolver. And we had over 18 million active customers worldwide.
Speaker 5: Turning to our local capitol, consolidated local blinks by 316 million down 8% compared to prior year.
Speaker 5: is of March 31, 2023, done 2% sequentially and 19% year-over-year. This is international. We deliver local blinks of 94 million, flat compared with the prior year, and had 5 million active local customers.
Speaker 5: Let's see eventually and up to percent year over year.
Speaker 5: sequentially and up 2% year over year. Moving to our boots and table category.
Speaker 5: and consolidated table brings the 35 million down 11%.
Speaker 5: Turning to our operating expenses, first quarter gap SG&A was 102 million and down 20% compared with the prior year as we began to see the benefits of our recent cost-saving actions reflected in our financials.
Speaker 5: Our known gap is GNA, which excludes stock-based compensation and depreciation and amortization, both 92 million, down 17% year-over-year.
Speaker 5: As a reminder, we completed our migration to the cloud in the first quarter of 2023 and remain committed to significantly reducing our cloud costs over time, which will be complemented by a lower payroll expenses resulting from the cost-saving actions we announced in January .
Speaker 5: charges related to our restructuring plan. Marketing expense for the first quarter was 25 million or 24% of gross profit. As we continue to deliver improvements to our fundamental marketplace experience, we will continue to deliver improvements to our fundamental marketplace experience.
Speaker 5: We believe we can get more out of our marketing dollars. Our goal is to sustain our marketing expense to below 25% of girls' profits in 2026. Turn it into our cash position.
Speaker 5: The end date of the quarter is 155 million in cash, including 48 million drone on Zara Blur.
Speaker 5: In the first quarter, we had net operating cash outflows of 76 million, including 10 million one-time payment for hourly termination of our chicken go to fees.
Speaker 5: I start reminding the typical experience networking outflow in the Pro School of Derville, put the year due to seasonality and all normal merchant payment cycles.
Speaker 5: We also repaid 27 million of borrowings under our revolving credit facility during the vote. In the second half of 2022, they completed a majority of cost actions related to phase 1 of our restructuring plan.
Speaker 5: It is expected to remove 150 million of costs from the business.
Speaker 5: And earlier this year we began executing of the second phase of our plan and are on track to substantially complete these actions by the end of Q2.
Speaker 5: In total, we expect these cost actions where reduce our expense structure by 250 million. These cost actions allow us our mark and amendment to our credit facility. Examples of spent on group one had taken towards improving its financial foundation to support our confirmation on this year.
Speaker 5: With these actions and additional management plans, we believe we will have sufficient liquidity to meet our obligations as they become due over the next 12 months.
Speaker 5: Groupon continues to vote by 2.29%
Take with the stake in the private layout global payment provider summer.
As a reminder, be reflective of the stakes.
as well as other minority investments on our balance sheet. The carrying value for this investment is approximately 120 million.
While there is no public market for some upsecurities at this time, if an opportunity arises to monetize this asset, we would consider this possible.
To help you with your models, let me walk you through how these savings are expected to translate to RPNL during 2023.
We began to see this cost savings during the first quarter of 2023, an estimated full year non-GAAT 2023 at GNA to be approximately $320 million.
Beyond 2020, we will be able to leverage our annual non-get SG&A run rate expenses to be approximately $290 million. Given we are in the midst of executing our turnaround strategy, we are not providing formal guidance at this time. In light of this, we are going to be able to leverage our annual non-get SG&A run rate expenses to be approximately $290 million.
We are providing more details on our expectations for the year. As we found mentioned, we expect our second quarter revenues to decline year over year at a similar rate to what we observed in the first quarter.
And while we expect our 3rd and 4th quarter to decline year over year, I would expect to see a slight improvement in the rate of declines each quarter. As our transformations by the J-Techs hold, we expect to see an increase in year over year local billings by early 2024.
So our revenue growth trends might diverge from our local billing trends depending on the trajectory of our other categories and the timing of our transformation strategy.
Turning to profitability, we do expect to generate positive adjusted EBITDA for the remainder of the year as we start to realize the benefits of our restructuring actions more meaningfully.
On free cash flow, our ability to convert positive adjusted EBITDA to positive free cash flow will depend on the timing of our working capital cycle and other cash expenses. As a reminder, our working capital is historically being impacted by seasonality.
It's our first quarter generally experiencing a large negative working capital impact and our fourth quarter experiencing a positive working capital impact. Given our current equity market volition, our summit stake and our operating plan, we are not expecting a negative market volatility.
focus on unlocking both top-line growth and expense savings, we believe we can create value for all of our stakeholders as we continue to execute our strategy of transformation. Thank you for your time today. With that, we would like to open the call up for your questions. Good morning, everyone.
Thank you. If you would like to ask a question on the phone lines today, you can press star one on your telephone keypad. To remove yourself from the queue, that is star one again. We'll take our first question from Trevor Young with Barclays.
Great, thanks to if I may. First one, just any color on North America and international local buildings in March and so far into 2Q. I think the data points that we had last print were that January and February were trending around 46% of 2019 levels. And it looks like full quarter results was a bit softer than that, but maybe some FX noise in there. So just trying to understand whether, you know, trends deteriorated in March.
you from monetizing that in the next three to six months if there were a sufficient bid from some party.
Okay, so this is C.C. Hi. About the local buildings in Northern America, we have for Cuba on 222 million US dollars, which was down 14% quarter over quarter and 11% year over year.
And your second question about balance sheet and sum up and so on. We can imagine potential monetization of certain non-core assets including our stake in a sum up.
ownership of a gift card or a portfolio of intellectual property. The same way as we are
first-wing additional transactions for seeking additional financing from both public and private markets.
Okay, thank you. We'll take our next question from Eric Sheridan with Goldman Sachs.
Thanks so much for taking the questions. Two, if I could, just coming back to the eight strategic pillars you laid out, I wanted to hone in on number two and number three. So in terms of how you might want to invest and arc or change the product experience to align it with modern marketplace standards, I'd love to go a little deeper there on what you see as some of the key white spaces to attack or areas of investment to possiblyscar.
pursue and then the second would be your third pillar, how should we be thinking about sort of arcing or changing the marketing engine inside the company to align more closely with lower funnel performance channels how should we think about that in terms of either investments that need to get made or possibly changing some of that user funnel and user conversion.
that the marketplace has had over time. Thanks so much. Thanks for the question. Regarding the first part, raising our product experience to the modern marketplace standard, one of the first initiatives which we started when I joined the Groupon is that we launched a hackathon project which was a big part of our project.
engineering theme and which is
We are developing several major changes to our user experience that we have on our website. And we are making sure that taking up all the processes that we have on Google, on the news and the plus section that we have right now.
For example, the use of generative AI, which we will be using for our sales service for our merchants, but also for our sales team. Right now the whole process requires civil human defeat and...
I would say the quality of the deals which are generated through self-service is lower or lower performing compared to deals which are created by agents. And using the AI, we are able to base on the website of the merchant and experience from our own datasets and the similar.
from the similar campaigns and similar categories to generate the output which will be much higher quality, which means that the whole setup for merchants will be much more simple. And we have many more examples in development on checkout page and experience of customers on the website. So this is the first URL.
The second question on marketing engine and tuning up the engine towards the lower panel performance channel. We are kind of revisiting the setup of all performance marketing channels which we have and we are trying to put there a little bit more.
geofocus and little bit more measurement of performance in a very small PC small location. So let me tell you, adjust the stand and stand with the higher standards of campaigns and deals, which are higher performing versus the rest.