Groupon, Inc.
Q1 2021 Earnings Call Transcript

Published: 7 May 2021

[Operator:]

Good day, everyone, and welcome to the Groupon's First Quarter 2021 Financial Results Conference Call. . 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 First Quarter 2021 Financial Results Conference Call. On the call today are our interim CEO, Aaron Cooper; and CFO, Melissa Thomas. The following discussion and responses to your questions reflect management's views as of today, May 7, 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. We encourage investors to use our Investor Relations website at investor.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.

[Aaron Cooper:]

Good morning, everyone, and thank you for joining us to talk about our first quarter results. We've made a lot of progress over the past year from demonstrating the resilience of our business model to launching a new growth strategy, and we continued this momentum into the first quarter. We're excited to highlight our strong first quarter results and to provide you with more insight into our plan to become the destination for Local. In 2020, we significantly reduced our cost structure and expect to deliver substantial additional savings this year as well. These fixed cost reductions are allowing us to achieve greater flow-through to adjusted EBITDA as our top line recovers giving us an opportunity to deliver $250 million of adjusted EBITDA in 2022, if we can drive the business to just 80% of our 2019 gross profit levels. Based on this, we believe that we are well positioned to deliver value to all of our stakeholders over the coming quarters and continue to benefit from the macro recovery. Our first quarter results demonstrate this potential. We generated $30 million of adjusted EBITDA and took additional steps to further strengthen our balance sheet. From an operational point of view, we saw acceleration in North America Local in March, underscoring the role Groupon is playing in connecting customers with local merchants. All of this hard work and results are foundational to our ability to execute on our growth strategy. In International, both supply and demand remain constrained as restrictions on human interaction and business policies are still stringent. Based on this, we expect a longer recovery cycle in International in North America. In addition to recovery, as we've discussed over the past few quarters, we have a plan for growth, and we're executing on 2 strategic priorities

[Melissa Thomas:]

Thanks, Aaron, and thank you, everyone, for joining us today. First, I want to echo what Aaron said, we made important progress in 2020, and I'm encouraged by the momentum we brought into 2021. We see an exciting energy at Groupon that we believe is fueling our success. Today, I'll spend my time updating you on our financial and operating progress, including a review of our first quarter results, business drivers and recent trends; the status of our restructuring plan and liquidity; and an update on our full year 2021 financial guidance. I encourage you to review our slides and press release, which each contain additional details on our outlook for the remainder of the year.

[Operator:]

. Our first question comes from the line of Trevor Young from Barclays.

[Trevor Young:]

Two for me. I guess, the first one, more of a high-level strategy question. You noted being able to deliver upwards of $250 million in EBITDA to get back to 80% of pre-COVID GP and then some upside from there. How should we think about balancing profitability versus this $1 trillion TAM, which seems like it's not all that well mended or consolidated. Is the gating factor for going after that TAM more aggressively just getting the value prop late for merchants and customers? And it seems like you could take profitability down over the medium term to accelerate the top line, and it sounds like maybe we're getting a little bit of that in 2Q. Second question, could you provide some color on in-quarter customer trends to help us frame possibly getting that stabilizing trend later in the year? I know this is a TTM metric and now we're capturing kind of the full year of the COVID impact, but are you seeing kind of any sort of stabilization in trends there?

[Aaron Cooper:]

Let me start and I'll ask for Melissa's thoughts as well. So your first question related to the strategy and the longer arc here. So let's take that in context. What we're talking about, and as you mentioned, is this $1 trillion TAM and the large local marketplace, and we're a market leader. So over the past year, you've seen us stabilize the business and invest heavily in the value prop components that you talked about. And this is really where our energy is. So the suites of tools we're bringing forward to merchants, more inventory and now the CX that we're bringing forward to customers. So as we begin to roll these things out, and we're starting this year, and they're going to roll more and more throughout the year, right now, this is happening right into recovery. And we see recovery very much as being a marketing opportunity for us in order to help customers and merchants understand all the changes that we've made to help them do more with Groupon. So for merchants, it's more services, more tools to work with us, easier ways to work with us. For customers, it's more inventory that they can buy and buy again on an interface that makes it more intuitive. So very much, right now, the recovery is a core focus, and that's what's driving a lot of the energy on our platform. And we see that recovery as being the catalyzing factor to advance our marketing and help customers and merchants understand. So you take the order, it's stabilization, which is now -- were now behind us. We're, right now, we're into recovery. And as we roll out components of our value prop, and they become more core of the way customers and merchants think about us, then growth and taking share in the TAMs on the other side of that. As it relates to our customer trends, one, I would very much relate that to your first question. So there's 2 opportunities to consider in our customer base and they relate exactly to what we're just talking about. So one, with our customers, we're changing the composition of our customer base. If you take the Groupon as a whole and the Groupon that we envision in the future, we're focusing on this core local customer. This is a customer that's worth 2x the value of other customers. Can you talk about the value propositions that we're changing for the merchants that can put on more supply for. We talked about the changes we're making for the customers, so there's more inventory she can buy and buy again with an interface that's communicative of that is we're doing this for this customer who will make up a greater share of our customer base. And then, with this customer, this is where we envision the ability to take greater wallet share as well. So over time, we expect us to build a greater concentration of this type of customer that's more valuable to us. Melissa?

[Melissa Thomas:]

Thanks, Aaron. Trevor, two things I'd add on. First, on your question around balancing profitability and growth and around the $250 million, what I'd say there is really given the significant reductions that we've made to our cost structure, we believe we are well positioned to deliver substantial adjusted EBITDA levels, if our business just recovers to 80% of 2019 gross profit levels. The $250 million of adjusted EBITDA is really intended to illustrate the power of our financial model on a significantly reduced cost structure. We'll look to provide actual guidance for 2022, once we get further down the path of recovery and start to have more visibility into recovery, post COVID, that will likely be in connection with the reporting of our fourth quarter results. What we are most excited about, though, is the progress we're making on the strategy and executing there, and how that positions the company for growth. And then, on the second point on customers, as I mentioned in my prepared remarks, we did take a step down in Q1 in our customer bells. That was expected. We just lapped because that is a trailing 12-month metric. It does take time to have the full impacts of initial onset of COVID in there. So we just lapped the onset of the pandemic this quarter, and we still expect our customer balance to stabilize by the middle of this year. I think though, to echo Aaron's point, one thing here is that we don't believe we need to get to pre-COVID customer levels in order to deliver substantial gross profit and adjusted EBITDA for this business. There's a lot of power in just being able to drive more engagement and purchase frequency out of our existing scaled customer base that we have.

[Operator:]

Our next question is from Ygal Arounian with Wedbush Securities.

[Ygal Arounian:]

I want to go back to the growth initiatives around inventory. Last quarter, you took them out of the four test markets and expanded that nationally. So maybe just an update on that as that progresses? And in North America Local, as you're seeing the acceleration in March and April, is there any way to think about how much those initiatives are helping the growth versus just the reopening and then, also versus the step-up in marketing? Or is it too difficult to do that when you kind of think of it holistically?

[Aaron Cooper:]

Sure. And thanks for asking about the strategy. So when we look at the test, just to bring everybody back to what we talked about, we launched our test in the second half of last year. We laid out milestones and we hit the milestones. When we completed the test, we told everybody that we were going to roll out Offers for our beauty and wellness merchants, and we're going to remove restrictions so that we could have 80% of our inventory be inventory that customers can repeat on. And we're making progress against both those goals. So why? One, we told -- we know that customers are clicking on things that they want to buy, and our site and our merchants have been saying no, and we want to be able to say yes. And we know that our merchants want to be able to do more with us so they can have always on inventory with us. Now, the results that we saw in our test was that we saw new merchants coming on with 80% of them didn't have these types of restrictions, so the customers could buy and buy again. As we're rolling this out, we're seeing 80% of new merchants coming on, are happy to not have restrictions, and want more customers. And the other 80% number is -- our target for this year by the end of the year is that we want to make sure that we have 80% of our inventory is repurchasable. So all of that is working and all of that's on track. The other thing that we've done is we rolled out Offers to our beauty and wellness merchants. The key metrics to take a look at there is our inventory per merchant was about 75% to 80% higher in our test market results. And as we're rolling that out now, our new merchants are coming in, in the same range, actually a little bit better. So everything we're doing in our inventory test and the things we said we're going to roll out are happening and are on track. Now to your question about timing and impact, these things are rolling out now. So you have both Offers are rolling out, restrictions are rolling out, and then other components as well, such as our new CX. So as these things gradually roll out, we expect the impact engagement to ramp, but that's not the type of impact that you're seeing in March and April.

[Melissa Thomas:]

I'm sorry, just to add on there on March and in April, and what's attributed to reopening versus growth, just to add a little bit more color there. As you think about the acceleration that we saw, there certainly were a lot of factors, as you highlighted, and as I highlighted in my prepared remarks, both macro on what we're seeing in terms of restrictions being lifted, pent-up demand, vaccines as well as marketing site. So hard to tease out there. But if you just step back and think about 2021 and what's going to be driving our results, we continue to believe that recovery will be the biggest driver of our results for this year with the growth strategy really having the opportunity to accelerate that recovery for us. And while on the North America Local side, in particular, we're cautiously optimistic there. What I would say is we do still expect performance to ebb and flow. And one example of that Ygal, would be, as we think about the second and third quarter of the year, we typically mix into categories like things to do. Those are still more -- much more heavily impacted by capacity constraints and other restrictions. So we certainly feel good about what we drove in March and April, and we're optimistic on the North America side, but we still expect on that to grow there.

[Ygal Arounian:]

Okay. And just one quick follow-up on that. I just want to speak your view -- you took this national, right? So you're doing this kind of -- in health and beauty, on a national basis at this time. And last quarter, we talked about not really moving into restaurants yet. It looks like we're still not doing that, but any more thoughts as we get closer to kind of a full-scale opening on moving across more categories than beauty?

[Aaron Cooper:]

Yes. Great question. So as we look at all the things that we're rolling out, yes, we're rolling out Offers at scale in beauty and wellness because we saw outsized engagement from those merchants, even in the midst of COVID. As we think about our strategy overall, we see a huge opportunity in all of our verticals. And we're very much designing value proposition that's going to work for all of Local. And what we learned in our test, and what we've continued to see, is that it's not going to be a one-size-fits-all approach as you point out. So now, if you take that and contrast it with the fact that we've kind of had only a Deals product and it can only work with us one way for all of our history, hindsight is 2020, but the fact is it's not going to be a one-size-fits-all approach. That's why we're making all of these changes to the value proposition so that merchants can be able to partner with us in more ways. And that's what they're seeing from them, and that's how we show up to be a better partner. So we're rolling out a full suite of products and tools that have numerous components in dimension. So just to put them together, these are all things you're aware of, but we know that all merchants want it to be easier. And you know what, we make it easier, you're going to want to be even more easier. And that's why we're rolling out self-service. That takes the cost down from them for working with us. The nice thing about self-service is that once they're engaged with it, things like the recommendation tools that we've rolled out, can actually make their Deals perform better with everything that you're doing. Also, we want to give them the ability to do more. And so that shows up in Sponsored Listings. And you know what else, all merchants want, they want better unit economics. And so that's why we have multiple listing types such as Deals, Offers and Market Rate. So once you realize that all merchants are unique, no matter which categories they're in, and that's clear, and that's why we've rolled out this broad suite of tools, we're now watching week-by-week greater adoption of all of these across our merchant base. And we expect that to continue more and more into recovery.

[Operator:]

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