Q2 2023 Groupon Inc Earnings Call
Hello, and welcome to coupons second quarter 2023 financial results conference call.
On the call today are interim CEO , Johnson, Keppel and CFO Gary partnered.
At this time all participants are in a listen only mode.
A question and answer session will follow the Companys formal remarks.
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.
Today's conference call is being recorded.
Before we begin coupon would like to remind listeners that the following discussion and responses to your questions reflect management's views as of today August nine 2023, only and will include forward looking statements.
Actual results may differ materially from those expressed or implied in the company's forward looking statements.
Coupon undertakes no obligation to update these forward looking statements as a result of new information or future events.
Additional information about risks and other factors that could potentially impact the company's financial results are included in their earnings press release and in their filings with the SEC, including their quarterly report on Form 10-Q.
We encourage investors to use coupons investor relations website at Investor Doc coupons 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.
Corporate governance information and select press releases and social media postings.
On the call today the company will also discuss the following non-GAAP financial measures.
EBITDA non-GAAP SG&A free.
Free cash flow and FX neutral results.
And coupons press release and their filings with the SEC each of which is posted on the Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable measures under U S. GAAP.
Unless otherwise noted all comparisons are provided on an FX neutral basis.
And with that I'm happy to turn the call over to Sean.
Hello, and thanks for joining us for our second quarter 2023 earnings call.
Pleasure to be with all of you in today's prepared remarks.
Turning to an investor presentation, which is posted on our Investor Relations website.
In addition, I encourage you to review our press release, and 10-Q, which contains more detail on our Q2 results.
I will start todays call on slide five with a.
Top level overview of Grupo <unk>.
Our mission is to become the <unk>.
The explanation for local experiences and services.
Every day, we see reasons to believe in our mission and our ability to drive value for all stakeholders.
We wanted to see if some millions of daily unique reviews from consumers, while exploring to discover an extraordinary experience alright, so local service.
And on the supply side of our marketplace.
<unk> has thousands of merchants ranging from popular national chains, and a globally known.
Experiential destinations to local small businesses, who place their trust in Groupon is an important toolkits to achieve our growth objectives.
As we execute and deliver against the opportunity to serve both consumers and merchants, we believe that our business model has the potential to unlock significant shareholder value as indicated by our 87% gross profit as a percentage of revenues and 63% contribution margin for the trailing 12 months.
Moving to slide six.
After completing the first quarter as interim CEO I have better visibility into how much of Eric as we think ahead.
At the same time I can see that we are on the right path towards successful transformation of the company.
While our product experience and financial results may indicate incremental changes from the outside and certainly there are large changes underway.
From my perspective, the positive signals I see from this quarter include our.
Targeting a growth cost leadership team.
Gaining a better management of the levers to drive revenue.
<unk> on our performance marketing specs and our ability to lower our SG&A costs, while at the same time, improving our ability to execute.
And while our financial results are not acceptable I am pleased to see our second quarter of 2023 year revenue declines of minus 16% year over year modestly improved versus our Q1 results of minus 21% year over year.
We returned to positive adjusted EBITDA generation of $15 million.
On the negative signals well not new to Groupon, our employee attrition rate continues to run well above industry benchmarks.
Of this attrition is to be expected given the transformation.
We expect to handle the RASM by internal promotions and new hires and.
In addition, you saw another quarter of free cash outflow as our free cash flow like a return to positive adjusted EBITDA generation.
He will provide more details on the drivers of this divergence in his section.
Slide seven please.
Overall I am pleased to report the transformation plan, we presented last quarter is in place and trucking to my expectations.
<unk> of our planet can be grouped into three key work streams are rebuilding our organization.
Utilizing our marketplace and our financial Foundation, we are urgently pushing ahead with our transformation on all fronts and raising the bar across our organization.
As we make progress on our transformation plan I expect to show year over year improvement every quarter going forward in 2023.
Now, let me say a few words in greater detail in several of our peers moving to slide eight please.
Over the last nine months the company has taken Swift action to install a new senior management team by leveraging <unk> strong brands in the Czech Republic.
Hiring former Groupon employees.
And strategically making fresh hires.
I am personally happy with new leadership team we have assembled.
Spike coming together in a relatively short period of time. It has been great to see the team go together and embraced our transformation.
With every month the team is improving the speed and efficiency of execution, while continuing to challenge the status quo and constantly seek improvements the best teams within and I believe we are putting together the best team I have ever worked with.
Slide nine.
Our transformation is really about changing the ability of the company to deliver and execute we.
We are going into the details and step change.
Changing the organization structure people culture processes and systems.
As we realign our teams and simplify our processes.
Enabling the company to become more external focus to better understand the needs of our customers on both sides of the marketplace and started building solutions to help solve their problems.
Examples of changes we are bringing to the company include for example squad an initiative started in our global services organization and expanded in other departments.
Gross functional small teams are created for a limited duration to address one specific issue of inefficiency or new opportunity.
Currently we have 17 of Scott's running.
Adoption of AI across the organization has enabled us to improve the copyright think of our deals and deals creation process.
We are also leveraging AI on projects in product and engineering to help improve our dealer recommendation of quality assurance among other areas.
Improvements in enterprise sales organization and process changes combined with value proposition changes.
Hoping to return our enterprise accounts to year over year growth.
Slide 10 please.
In the second quarter, we made positive progress on the demand side of our marketplace.
The last several years, our business heavily invested in promotional spend to drive conversion.
Resulting in a spend on promotions in 2022 at almost two times the amount we spend on paid marketing.
This promotional spend is on top of the initial deal discount for many merchants offer and the Harris our merchant value proposition.
Reducing our reliance on promotional spend on improving the mix between based marketing and promotional spend is a key step towards improving the health of our marketplace.
In the second quarter, we began the process of gradually reducing our reliance on promotions.
I do not expect progress here will billionaire a key enabling project there'll be shifting to a personalized approach. We took an important step on our personalization project and the launch of our new Popup Ice's product.
Turning to paid marketing, we made great progress in rebuilding our performance marketing stacks, including search engine marketing and display channels.
And also improve the connection between our marketing campaigns and our top deals.
With the benefit of a stronger foundation, we started increasing our paid marketing spend in the quarter.
And so our gross profits from performance marketing returned to year over year growth in June .
We believe our performance marketing channels are ready to receive additional investment and are looking to ramp up further in Q3.
By efficiently scaling our performance marketing channels. We believe we can drive increased traffic to our site and offset any potential headwinds from lower conversions as we gradually reduced our promotional spend.
Based on marketing, there's only one of our demand sides channels and we are still experiencing declines in our direct to site and <unk> channels such.
Such as E mail and push notifications.
In the short term as we increase our paid marketing, we expect to see only a small spill over effect into direct and matched channels.
As we execute on our overall plan to revive our marketplace grew product and supply changes our long term goal as customers.
Guided by paid channels, they'll become repeat purchasers and returned through direct channels.
Slide 11 please.
And our technology organization, and we are moving from fixing things to building things and launched an ambitious hecatomb projects in Q2 under our new head of product.
After fairly limited new product development at Groupon.
Several new product features that are helping improve the experience of our consumers merchants and our employees.
On the consumer side, we are building, a new consumer web and mobile application, which will simplify our infrastructure and enable us to deliver faster development changes yes.
We are also developing a new gifting proposition, which we expect will be launched in time for the holiday season, as we build our projects are no longer done in silos, but connected across the across the company.
Our gifting project will have work streams and supply to ensure our sales is attracting more premium supply which is better focus.
And also changes to our SCO and paid marketing campaigns.
On the merchant side, our product changes are focused on improving the convenience for merchants.
One example of a new development this quarter as our redemption, API, which enables merchants to seamlessly redeem a voucher eliminating our priority <unk> to look into the merchant center and menu a little old voucher redemptions as.
As we continue to improve our merchant product experience. Our long term goal is to be seen by merchants as a marketing technology platform rather than a discount Portland.
And like many businesses today, we are constantly asking ourselves how can groupon incorporate genetics AI into all our product development roadmap in the second quarter, we launched a beta version of our new AI driven deal creation tool, which would allow merchants to create a new deal with deal structure and.
<unk> content all in one click.
AI has the potential to be a game changer for our business and has been involved in most of our new product features.
In addition to our product changes our engineering team continues to make great strides to simplify our platform, reducing the number of micro services by a further 6% since the beginning of the year.
While it's still early days on our journey to build a world class product experience I am proud of the work our product and engineering team is doing to cut down on costs. While at the same time, taking on ambitious projects to improve the product experience with <unk>.
Significant transformation underway has not been easy and I am grateful how the product engineering team is handling the changes.
There is new excitement in our technology organization and I am excited to be sharing with you more updates in the quarters.
Slide 12 please.
On the supply side, we are taking a back to fundamentals approach to running sales.
Our three priorities are one tool supply acquisition and retention to sales performance and efficiency and free evaluating higher investments into our sales network.
I think the right quality inventory on our marketplaces critical our top supply is less than 20% of our deals.
The majority of our business.
This past quarter, we studied the top 100 accounts to understand what works and what doesn't and what we can do to improve our merchant value proposition.
We have been hard at work to define the correct deal structure categories merchant value proposition and Dr. Ranking amongst other features that together make up a quality deal.
While still very early we are seeing that our focus on targeting quality deals at the Geo focus level is paying off with our top five markets in North America outperforming our other markets in North America by double digits.
In the first quarter, we expect to expand our focus from the top five markets in North America to the top 23 markets.
We continue to take steps to improve our sales force performance and efficiency, including annuities allocation tool continuing new changes to our sales incentive programs to better align it with the company's goals and further globalization and standardization of our sales operations.
The steps, we are taking to improve the pipeline of the Nielsen our salesforce profitability converting the pipeline is setting up a strong foundation as.
As we exited the second quarter, we have started to evaluate the higher investments into our sales network, including potentially increasing the number of sales representatives.
It's still early days I am excited to be sharing a few more updates in the quarters ahead.
Slide 13 please.
Before I turn it over to <unk> to provide some insights on our financial performance and product provide an update on our outlook, let me give a few concluding comments.
Sorry update if you will asked quarter, our financial results indicate a serious challenges our business phases and underscores the need to implement a significant and urgent transformation.
We have a lot of work to do and the results will take time at the same time I am more confident than ever that we will succeed in our transformation and we will lay the foundation foundation for our long term success.
And although we havent finalized and are still considering approaches to financing and asset monetization I.
I feel confident that all or some combination of these initiatives will enable us to enhance our financial flexibility and liquidity position.
With that I will turn it over to <unk> to provide some insights on our financial performance.
Thanks, Michelle and thank you as well to everyone who is joining us today, it's a pleasure to be here today speaking with you.
I believe my time today to provide further insight.
Our second quarter financial results.
Yes on our cost savings actions progress on our plans to increase our financial flexibility.
Factors to consider for the remainder of the year.
Before I begin I would like to make a few observations after one quarter our CFO .
Professionals, which I appreciate.
Despite this.
We're looking to fill certain rules.
Opportunities in the simplification of the processes as well as in automation.
Turning to slide 14.
So let's jump into our second quarter financial results in the second quarter, we deliver $129 million of revenue 91 million of contribution profit and $15 million.
EBITDA.
Third quarter free cash flow was $45 million and we ended.
In the quarter with $118 million in cash.
Including Fortis upon the Milan Barone on variable.
Our top line results in the second quarter, a slight improvement in year over year trends versus our first quarter results and our adjusted EBITDA generation benefited from realized savings from our cost actions.
Okay.
Marketing expense for the second quarter was 22 million or 20 person from gross profit.
As we continue to deliver improvements.
So our performance marketing channels.
It started to increase our marketing spend.
And the second quarter.
As long as we are able to maintain adequate returns.
We expect to continue to increase our investment into our marketing going forward as a key driver.
Information.
We experienced another quarter of significant cash outflow.
Our return to free cash flow generation like our return to positive adjusted EBITDA.
I'll have more to say on the divergence of adjusted EBITDA and free cash flow later in my remarks.
Slide 15.
Slide 15 <unk>.
We delivered 893 million girls billings and had over 17 million active customers broke volume as of quarter end.
Turning to our local category.
Consolidated local billings.
120 million down both person compared with the prior year.
Within North America, we deliver local billings of 232 million.
Down 13% year over year and had $8 7 million active local customers.
As of June 32033 down for each person sequentially and 17% year over year.
Within international.
We deliver local billings of $8 8 million.
Down 9% year over year and had $4 9 million active local customers.
Down, 2%, both sequentially and year over year.
Moving to argues in favor categories.
In the second quarter consolidated.
<unk> billings by $42 million down start demand year over year, and consolidated tenant billings by $32 million down 15% year over year.
Slide 16.
Turning to operating expenses second quarter, SG&A was $96 million down, 22% year over year and down 5% quarter over quarter.
We continue to see the benefits of a reason cost savings actions are reflected in our financials. SG&A includes $7 5 million in stock based compensation and $6 6 million and depreciation and amortization.
Zinc and efficient cost structure is a key pillar of our transformation plan and we have launched multiple projects across the company to reduce our fixed cost structure.
We continue to see opportunities to improve group one's ability to execute more efficiently and further reduce costs.
Slide 17.
Turning to free cash flow.
Despite producing positive $15 million of adjusted EBITDA in the second quarter and positive $10 million of adjusted EBITDA in the first half of 2023.
Our business experienced significant cash outflows.
In order to better help investors understand the bridge between adjusted EBITDA and free cash flow this breakdown.
Great.
The identified the five large drivers.
I will provide the following commentary.
Capex is primarily driven by capitalized labor.
Change in merchant payables.
Given by billings growth.
Both declines and secondarily impacted by our merchant payables cycle.
Change in accounts payable is driven by changes in our accounts payable cycle as we improve our purchase order approval process to streamline the payment process for our vendors.
Change in accrued a G&A and other expenses.
Expenses is driven by our SG&A and other expense.
Our aging.
Change in operating lease obligations will be driven by our explorations.
So this is going to be precise our real estate footprint, it's all currencies.
And in the first half included one time payments associated with the lease termination of our Chico facility.
Slide 18.
We are currently evaluating several different options to enhance our liquidity position.
These options include but are not limited to first week additional actions under our multiphase cost saving plan seeking additional financing from both.
Public and private markets.
The issuance of equity or debt securities on potential monetization of certain noncore assets, including our stake in some ownership of default in our portfolio of intellectual property.
Groupon continues to hold.
29%.
Equity stake is a privately held global payments provider somewhat im.
As a reminder, <unk> of the state as well as the other minority investments in our balance sheet.
The trading value for these investments is approximately $120 million.
Well, so I guess no public market saw some securities at this time.
Opportunity raises to monetize this asset we would consider this path going forward.
As <unk> covered in his remarks, our business performed better than expected in Q2.
Could you give us increased confidence in our future.
In addition.
We have made some progress on our plans to seek financing and pursue asset sales.
And we have received several proposals that are currently under consideration.
While management intends to improve our liquidity and meet our obligations through the plans described above those plans are not final and are subject to market and offer.
The conditions not within our control.
As a result, as we evaluate various financial scenarios in accordance with U S. Generally accepted accounting principles and consider our obligations over the next 12 months, including our credit facility maturing May 2007, before we have concluded the sponge do.
Alleviate substantial doubt about our ability to continue as a going concern.
Slide 19.
Lucian NII on a one quarter into the role we have better knowledge about the company and are more comfortable with the confirmed with confirming our prior outlook.
We are pleased with the progress we made this quarter and we expect to see year over year improvement every quarter going forward in 2023.
At the same time.
It's still very early.
And transformation progress will not always be leaner.
While we are not providing formal guidance at this time I would like to share with you our updated outlook.
For our third and fourth quarter revenue expectations, we expect to see slight improvements in the rate of year over year declines each quarter.
Our transformation strategy takes hold we expect to see an increase in year over year local billings by early 2024.
Through our total revenue gross rins made diverge from our local billing spreads depending on the trajectory of our auto categories and the timing of our transformation strategy.
Previously mentioned, we believe our performance marketing channels are ready to receive incremental investments.
And expect to increase our marketing spend as percentage of gross profit.
On our cost profile, we expect our full year non-GAAP 2000, Twenty's SG&A will be efforts in at least $320 million.
Beyond 2023.
It's too early to affirm our outlook for 2024, we do expect our.
non-GAAP SG&A for 2020 before will be below.
Our prior outlook of $219 million.
As <unk> mentioned in his remarks, we are also evaluating higher investments.
Our sales network, which may.
May offset some of our expected savings in 2024.
We expect to be able to provide more details.
Our next earnings call.
Turning to profitability, we expect to generate positive adjusted.
EBITDA.
The remainder of the year 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.
For our third quarter, we expect our cash flow.
There will be negative.
However, we expect the outflows will be less debt in the second quarter.
For our fourth quarter, we expect to generate positive cash flow.
Given our current equity market valuation was our operating plan.
<unk> focus on unlocking both top line growth.
<unk> savings.
The value of our noncore assets.
Believe we can create value for all of our stakeholders as we continue to execute our transformation strategy.
Thank you for your time today with that I would like to open the call for your questions operator.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question comes from Robert Young from Barclays. Please go ahead. Your line is open.
Great. Thanks first one just on the cost guide for the back half help us walk through the puts and takes on EBITDA.
A $15 million EBITDA this quarter. The SG&A guide have still $320 million for the full year versus $200 million here and one H implies a big reduction in <unk>, SG&A, which combined with maybe some incremental gross profit in the next couple of quarters would imply EBITDA would potentially be materially higher than one H and any.
Way to size how much reinvestment.
Youre contemplating for marketing just trying to help lineup EBITDA in the back half that's my first question.
Yes, if you can pick it. Please thank you for asking the question.
Thank you for the question.
Actually yes.
Beyond moving down.
Okay.
Okay.
First.
Quarter over this year.
Adjusted EBITDA M&A continue Amit.
Uh huh.
Broker deposits.
Which overall breakout for Kirk.
Half year EBITDA.
<unk>.
Second half.
<unk> will be lower.
Unfortunately.
EBITDA to deliver overall positive EBITDA adjusted EBITDA for this year.
Okay, and then second question on the gift cloud business helpful. Breakout on some of those noncore assets that you are evaluating.
Just for gift card specifically, how large is that today in terms of revenue or EBITDA contribution or what is the carrying value of that asset on balance sheet as it seems as though the investment line on the balance sheet is entirely sum up just trying to.
Is that business.
Yeah.
Sorry, but beyond providing disclosure on gift cards.
It's part of the bigger company part of the IDL and beyond.
Shipping out.
Number.
Okay no problem. Thank you.
Thank you.
As a reminder to ask a question. Please press star one our next question comes from Eric Sheridan from Goldman Sachs. Please go ahead. Your line is open.
Yeah.
Thanks, so much for taking the questions two if I could just first in terms of key learnings as you.
Taken over operating the business what do you see as the biggest opportunities in front of you that you're most excited to execute against and what are some of the sort of structural challenges that you feel will likely take longer to play out in terms of realigning the business for the longer term that would be number one and then you talked about merchants and supply on slides 11.
11, and 12, we'd love to get a sense of where you think you need to get scale of supply.
Over time to sort of.
To use your words fix the supply side in the marketplace and how you think the merchant offering might need to change to sort of drive supply growth. Thanks. So much.
Okay. Thanks, Thanks for questions.
So I hope I remember.
Part of that first of all we have internal discussion about low hanging fruits in one of my fellow colleagues mentioned that the low hanging fruit in our case is slight low hanging base.
So.
Don't see one or two or three big items, which.
We can just change and the company will be like fly them to be up a chain, but is there much every part of the of the organization.
Every pretty much every process inside the organization as you saw in the presentation, we are fairly big.
Steve <unk> senior management team.
And like every single member of the team is really rebuilding the organization part.
So that's on that path in terms of the.
Value proposition and how we see going forward would we need to change like one off projects that ensure we started this quarter.
But the main thing with new rate cards, making becomes much easier to onboard on groupon.
Make our let's say fee structure more comparable with our other marketplace.
Which are available on the internet.
That's the major part would you be will be continuing down the road.
In terms of like promotional structure and how the deals.
There'll be different.
In the in the future.
We believe that going forward as we will be decreasing the promotional spend increasing quality.
All of the deals we will be simply able to so more deals service fees.
On our website with slightly higher discount compared to list price, which will make the whole business case, much more viable for merchants and having the quality deals. It will mean, but also the value proposition for customers will be same or actually not same in my opinion it will be much better than we have right now.
Okay.
Thank you.
Yeah.
We have no further questions in queue I'd like to turn the call back off of Q2 to Shawn for any closing remarks.
Okay. Thank you. So thank you everyone for joining we look forward to continuing to update you in our future conversations and as always if you have any questions feel free to go to our Investor Relations team.
Evening.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Do you have any questions feel free to go to our Investor Relations team.