Groupon, Inc.
Q3 2021 Earnings Call Transcript

Published: 5 Nov 2021

[Operator:]

Good day everyone, and welcome to Groupon's Third Quarter 2021 financial results, conference call. At this time, all participants are in a listen-only mode. Question-and-answer session will follow the Company's formal remarks. To ask a question . Once again, to ask the questions. Today's conference call is being recorded. For opening remarks, I would like to turn the call over to the Chief Communications Officer, Jennifer Beugelmans. Please go ahead.

[Jennifer Beugelmans:]

Good morning and welcome to Groupon's Third Quarter 2021 Financial Results Conference Call. On the call today are Interim CEO, Aaron Cooper, and Interim CFO, Damien Schmitz. The following discussion and responses to your questions reflect management's views as of today, November 5th, 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.groupon.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 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.

[Aaron Cooper:]

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. But first, let's take a step back and reflect on our progress this year. When we kicked off 2021, we told you we needed to execute in a few key areas this year, and that doing so would be both indicative of important progress and foundational for future growth. We told you that we needed to understand our dealer inventory. Later, you'll see data that shows we've done just that. We told you we needed to scale offers in existing ones. And again, you'll hear that we've hit our goal there too. You'll also hear that we've begun to see impact. Yields are evidenced that strongly suggest, that we can 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 regions to believe, starting with a few highlights on our financial performance in the third quarter. Multiple 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, $214 million in revenue, and $35 million of adjusted EBITDA. Solid indicators that we remain on the path of recovery. At the same time, we're executing against our strategy to unlock velocity on our marketplace. Over the past year, we've done a lot of work to identify and deliver on our merchant-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 encourage our customers and merchants to do more with us. 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. What exactly have we done? Let's start with our merchant value proposition. We have improved the ease with which merchants can interact with the Groupon marketplace, extended their reach to new and existing customers, and giving 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 in 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 me give you a few key operating results from the third quarter, which illustrate our progress. On the supply side, we continue to make progress, bringing back pre-COVID 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 have early but very encouraging results from our efforts to drive repeat purchases. I'll walk you through the impact later in my prepared remarks where we're seeing unit growth from our unrestricted deal inventory that we believe sets 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 Groupon, 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, for mostly things to do merchants, at the back on our marketplace, we believe we would have picked up between 10 and 12 percentage points of local billings, for 2019 levels in North America. In addition, we believe we were impacted by the Delta variant and other transient COVID 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. To 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 cases are down due to supply, demand, and balances, 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 their capacity issues. But with line-of-sight to bring these 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 strategies rooted in our belief that we should be capturing more of the 80 Grouponable moments that the average customer engages with annually. Quite simply, we believe we need to drive purchase frequency and 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 of us. In the past, we gave merchants only 1 way to work with us

[Damien Schmitz:]

Thanks, Aaron, and thanks everyone who's joining us today. Today, I will 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 contain 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, $214 million of revenue, $181 million of gross profit, and $35 million of adjusted EBITDA. We ended the quarter with 477 million in cash. 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 global only customers. This resulted in 4% quarter-over-quarter growth for active local customers, partially offsetting the decline in our lower value to its customers during the quarter. While our total North America active customer account came in slightly below our second quarter balance, everything that we're doing, both for the merchant and customer, is aimed at building a stronger, more valuable customer base. We are 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, active customers have not yet stabilized given the more prolonged COVID headwinds there. Next, I'll provide more insights into our third quarter results. Starting with our segment and category results. As we expected, trends haven't been one year 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 your trajectory inter-quarter, local billings as a percent of 2019 levels pulled back in late July with the emergence of the Delta variant. In international, local billings for the third quarter were 47% of 2019 levels on an FX-neutral basis, up 600 basis points versus the second quarter. And as we said before, we continue to expect a longer recovery cycle in international. Our third quarter global-local gross profit benefited from $19 million of variable consideration from unredeemed vouchers that were sold in our 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 vouchers sold at the onset of the COVID-19 pandemic. That said, we're 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 iOS updates, as well as competitive dynamics, which further supports our de -emphasis on the category. I'm pleased to report that the international goods transition to a third-party marketplace model, which we began in the second quarter, is approximately 85% complete, expected to be complete at the end of the year. Similar to North America, is greatly simplified 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 on third quarter and reflects an increase in spend as we made investments in 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 now to position Groupon for the long term. In light of our third quarter performance, we are updating our full-year 2021 financial guidance. We now expect to deliver $130 million to $135 million of adjusted EBITDA for the full-year. And we expect to deliver between $950 million and $975 million of revenue for the full year. Let me provide some additional context around our updated full-year outlook. We expect low billings to moderately increase in Q4 versus Q3. And that global billings may continue to be impacted by factors outside of our control, such as the level of seasonal local demand, because it impacts on 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 3P model at the end of 2021. Lastly, our intent is for marketing, as a percent of gross profit in the fourth quarter, to remain in line 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 strong conviction that we're executing the right strategy to take share in local market. We're continuing to make progress, improving our high-quality inventory, and we're beginning to see a positive impact on consumer demand. I will now turn it back over to Aaron for some closing thoughts.

[Aaron Cooper:]

Thanks, Damien, 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 on our way to reposition Groupon to deliver on the promise of being the destination for local. We're showing customers how to do more at Groupon and that they can come on us for the value selection convenience they want. Our local marketplace is simply better than it was before. We believe increase in purchase frequency is the biggest unlock to driving velocity in our marketplace and increasing our share of wallet. And I'm so proud of what our team has accomplished over the last 18 months. We have the potential drive strong long-term growth and I'm looking forward to seeing what we can accomplish. And with that, open the call to questions.

[Operator:]

As a reminder to ask a question . Please stand by while we compile the Q& A roster. Our first question comes from the line of Trevor Young from Barclays. Your line is open.

[Trevor Young:]

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 from merchants to get broader reach, but it would also seem that allowing a third-party to own more of the customer relationship, outside of a Groupon surface. Do you have any concerns about that? and how should we think about potential future partnerships like this, either on the campaign enablement side like you did with Square or on the distribution side. And then second one for Damien, any color on how local unit or billings growth progress throughout the quarter versus 2019 levels, and how that trended into October. Thank you.

[Aaron Cooper:]

Thanks, Trevor. So let me take the first one and obviously we'll get Damien 's thoughts on your second question. As relates to our partnerships, Groupon is really a beloved brand. We have customers that have been with us for years and are -- 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 volumes to our merchants, but really extending the value proposition. So, with Google, we are going to be able to give users on the Google Platform direct access to Groupon deals, and that's also as you point out, going to help merchants do a lot more with what they want to do with Groupon. And then with Square, this is chance for us to build upon what we've already done. A lot of the partnership with Square is built on self-service. It's built on Groupon connect. Things that we just could not have done before. So now with more inventory, more repeatable inventory, more tools for merchants, yes. You should expect us to do more and build on top of these partnerships. Damien?

[Damien Schmitz:]

Thanks Aaron. And for some color commentary on the progression that we're seeing, we saw the pull back from Delta variant late July and early August, and those were the biggest impacts that we felt overall. We're encouraged with what we're seeing this far in October, which did improve from those low points earlier in the summer, but keep in mind as you think about the rest of the quarter. November and December generally play a larger role in the fourth quarter, particularly as consumer behavior shifting into a gifting season. And we're cautiously optimistic about the unique opportunity for us to lean in here into 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.

[Trevor Young:]

Great. Thanks guys. Appreciate the color.

[Operator:]

[Aaron Cooper:]

Let me go ahead and then also add just for Trevor 's question to put it in broad context here because these partnerships that you'd 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, essentially year-and-a-half is significant changes. We've completely opened up our merchant value proposition, flexing into self-service, which you've seen huge merchant adoption, more inventory options are again you've seen significant adoption by our merchants and now giving -- of course, giving customers ability to buy and buy again. These are profound changes. It just would not have been possible with the old business model, and so you see real proofpoints coming through. With merchants, you see them trusting more and doing more. Why? These are things that they expect from a marketplace, and have long asked for from Groupon. That's why you see the significant updates, in each of the different components. Now with customers, we see customers start to vote with their wallet. The 7% lift that we shared, was 700,000 customers engaged in our repeatable inventory, is really significant deal. This is customers voting saying, we want to do more through bond and they're starting to understand. It's not just about changing the inventory, was about changing their perception. Which is why the changes we made to the CX, and our marketing were so important. Finally, when Trevor asked about the partnerships, you've also seek partners leaning in from both sides. And the reason was asked why? It's because of the uniqueness of our inventory. Our inventory is something that nobody else has, and when it shows up in the Google Pay app, that is stuff for them. And then for these that are on Square, we've given them an easy way to happen the Groupon demand, and I've talked to a ton of merchants. And there's many of them that know that they can't get this type of demand Where else, So for us, we see the opportunity as large. We're making a ton of progress, either big change in the short period of time and you should expect this to continue to scale these wins more broadly in the business and see the benefit builds on itself.

[Operator:]

You have a question from Ygal Arounian, from Wedbush Securities. Your line is open. Hey, this is Chad on for Ygal Arounian. Quick one on partnerships. Can you share any of the economics around them and how those work? And then any color you can give on the roll out of inventory scaling beyond the end of the year. When we can see it in more verticals and internationally.

[Aaron Cooper:]

Yes, thanks for the questions. So, I'm not going to share this partnership economics, but I mean you should understand that our goal here is in distribution or looking to lower our merchant acquisition costs by making things of course, easier for merchants and creating new acquisition channels for ourselves and likewise similar on the customer side is the way we are thinking about these partnerships and extending our value proposition off platform. And -- I'm sorry. Your second question?

[Ygal Arounian:]

Yeah. Just on the inventory scaling. Any update beyond the end of the year here, expanding into new verticals and internationally?

[Aaron Cooper:]

Yes. So, what you should expect from us is just continued on what we've done. And so, you should continue -- expect us to continue, of course, to hit our goals that we've already made significant progress on. That's rolling out offers in continuing to build, we already have the inventory growth that we've shared in Beauty and Wellness, over 30%, where partners, of course, are coming out with 4 times as much inventory. Additionally, we shared an important data point here related to Q3. And what effectively as a material but transient COVID impact, where we expect to have merchants back on our platform that in Q3 we believe would've made up 10 to 12 points of overall local bonds. That's really material and so if you added 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 these are merchants that we've talked to, who understand the revenue management and understand exactly why and when they'll be back. And with 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 recovery yet but international, we will begin to roll out more of these features and business practices to our international marketplace.

[Chad:]

Great, thanks.

[Operator:]

There are no further questions at this time. That concludes today's conference call. Thank you, everyone for joining. You may now disconnect.