Groupon, Inc.

Good day, everyone, and welcome to Groupon's fourth quarter 2019 financial results conference call. 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, press the star key, followed by the number one on your touchtone phone. Once again, that's star one to ask a question. Today's conference call is being recorded. For opening remarks, I would like to turn the call over to the Vice President of Investor Relations, Jennifer Buchanan. Please go ahead.

Good morning, and welcome to Groupon's fourth quarter 2019 financial results conference call. On the call today are our CEO, Rich Williams, and CFO, Melissa Thomas. The following discussion and responses to your questions reflect management's views as of today, February 19, 2020 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, our quarterly stockholder letter, and select press releases and social media postings. On the call today, we will also discuss the following non-GAAP financial measures, adjusted EBITDA, adjusted EBITDA margin, 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. All references to SG&A in 2018 exclude the charges for the IBM patent litigation. As we discuss our results during this call, note that all comparisons, unless otherwise stated, refer to year-over-year growth as reported. All gross profit comparisons are FX neutral, including gross profit per customer. And with that, I'm happy to turn the call over to Rich.

Thanks, Jennifer, and thanks to all of you for taking the time to join us today. In addition to this call, we've also issued our fourth quarter release and quarterly letter to stockholders. I hope you'll take the time to read them both and review our slide deck as they all go into significant detail about our results and strategy for 2020 and beyond. Our fourth quarter performance was disappointing by nearly every measure, and failure to meet the financial expectations we set will understandably frustrate our shareholders as it has us. This performance shortfall, coupled with the significant headwinds we faced, call for profound change, and we're taking immediate and decisive action to return the company to growth. We worked with our board and external advisors to develop a strategy and execution plan to unlock the potential in the platform and assets we've built over the last 10 years. We believe that our plan can return Groupon to high single-digit billing growth by 2022 while expanding adjusted EBITDA margins. Our strategy is simple. Turn Groupon into the local experiences marketplace. This means planning a quick exit from the goods category, dedicating resources to expand our local experiences marketplace, and executing a new course of action focused on four core priorities. First, building high-quality inventory density in core cities and bringing on merchants' full catalogs. Modernizing the mobile experience for customers and providing new tools to help merchants grow their businesses. relaunching the Groupon brand and marketing strategy to move from deal-centric to a local experiences marketplace, and reducing our costs and right-sizing our spend to support our go-forward business. We will be laser-focused on the biggest opportunity for Groupon and where our true strength lies, local experiences. It's a trillion-dollar opportunity. We had $3.4 billion in billings related to this market in 2019, and we are a clear leader in the space with significant scale. This is where we can grow. This is where we have the right to win. We are very excited about our go-forward opportunity, but obviously we have to acknowledge our fourth quarter and full-year performance shortfalls. Heading into the fourth quarter, we set expectations that we believed we could achieve based on our accelerated pace of product launches and other execution successes. Our North American local business had momentum as we exited the third quarter, and unit performance had improved steadily each month of the quarter. Midway through the fourth quarter, it became clear, however, that we were seeing far fewer customers engage with goods, and it impacted overall traffic to our site. The lower traffic ultimately impeded performance in all of our categories. This was particularly notable in November and affected our holiday peak period when goods engagement has historically been a business driver. Adding to these challenges, certain conversion initiatives and select did not deliver on expectations. Our traffic declines and these other factors, which Melissa will discuss in greater detail, combined to create a headwind that we could not overcome during the fourth quarter. Before I discuss our strategy, let's touch on goods. Our management team and board have been evaluating the role of goods for some time. Our fourth quarter performance and the challenges goods has posed over the past few years have clarified our path forward. Delivering on our growth strategy requires total focus on capturing the local experiences opportunity. Over time, goods has become a less meaningful driver of engagement and increasingly inefficient use of our impressions. It has effectively become a distraction in which we can no longer compete and that we cannot afford as it has taken roughly 40% of our impressions to deliver roughly 20% of our gross profit. This is the crux of our plan to exit goods. Groupon is the largest multi-category local commerce platform in our markets and we are well positioned to capitalize on the massive opportunity and local experiences. In 2019, We were a market leader and trusted brand, but with less than 1% market share. While the competitive landscape is fragmented, others are mobilizing against this opportunity, so we need to act now to extend our lead. To do this, we have to move quickly against a singular mission, winning in local experiences. We intend to put our power behind our four priorities, inventory, modernization, brand, and cost structure, in order to set the stage for Groupon's return to growth. Let me share some additional context about each of these. First, on inventory. We believe that increasing our inventory, and more specifically, elevating inventory quality and density in targeted core cities is mission critical. When merchant density is higher, we see an increase in purchase frequency, as much as 15 to 20 percent. We also know from our partnership work that our customers want a more comprehensive catalog of experiences overall. We need to offer unbeatable selection in the most desired locations, and this requires an incredibly targeted, granular approach to matching supply and demand, connecting high-quality merchants and experiences with high-intent consumers at the neighborhood level. To do this, we intend to realign our sales teams to target cities and approach merchants with a new go-to-market strategy that's focused on improving quality supply in specific neighborhoods and provides upfront competitive pricing. We will urge every merchant to give us their full catalog of experiences from market rate to slightly discounted to deeply discounted offers in order to strengthen our value proposition for consumers. We expect this approach to allow us to better leverage our deeply experienced and skilled local sales team and further empower our market leading sales force efficiency. We plan on rolling this out in phases with cities coming online starting this quarter and building throughout the year. By year end, we expect to have at least 10 major cities deployed. In addition, we plan to accelerate our inventory expansion with partnerships that will begin to benefit from our first generation of open platform APIs by the end of Q2. We expect these partnerships to not only add inventory in our target cities, but also efficiently deliver inventory breadth to all Groupon markets. On modernization, we need to deliver a beautiful mobile product that matches what consumers want from Groupon, a personalized experience with curated local merchandising. And for merchants, we need to offer new tools that will help them grow their businesses by attracting and retaining customers. In the second quarter, we'll be launching a new app that will begin to bring this new experience to life for our customers. Throughout this year, you can expect to see our consumer product roadmap prioritize bookability, search, discovery, and curation. We also intend to lean further into cloud-based machine learning capabilities to help us deliver on these goals faster. We plan to complement these efforts with initiatives that expand our bookable inventory. We've already seen how bookability can drive the business as we scale booking and international dining with 18% gains in purchase frequency for customers who buy and book through Groupon. We also need to begin prioritizing new merchant features, as merchant satisfaction is critical in our two-sided marketplace. So this year, our merchant product roadmap includes dedicated new tools with a focus on self-service options that will help merchants join the Groupon marketplace more quickly, with more pricing options and improved campaign reporting. In addition, over time, we expect to roll out even more ways for merchants to reach customers and promote on our platform. via new advertising options that can extend our platform and revenue streams. All of these efforts are meant to build a foundation to enhance our long-term partnerships with our merchants. Building a more modern marketplace should allow us to remove friction from the customer journey from discovery to purchase to redemption, help our merchants grow their businesses, and improve the overall health of our marketplace. With respect to brand, Groupon is already a beloved brand in a household name. with well over 80% aided awareness in the United States, a position few brands ever achieve. Our opportunity, however, is not just being known. It's being top of mind when our customers are looking for the best things to do in their backyards and beyond. Building this top of mind awareness requires leveraging our equity in deals and advancing the brand position to reflect our focus on local experiences. Today, we are well known for value in discovery. We have an opportunity to illustrate the convenience and incredible breadth of the Grouponable moments we serve. For most consumers, we estimate that these moments happen 80 or more times per year. As we scale inventory in the right locations and modernize our products, we believe we'll be in a great position to relaunch our brand in the second half of 2020. Across all customer touchpoints, we plan to lead with our experience's value proposition. Supporting these efforts will be a full funnel marketing strategy. Combining targeted, hyper-local marketing and new channel development, including social, with broader brand advertising and efficient transactional advertising to build the brand, drive consideration, and efficiently reduce reliance on email. With strong, experience-driven brand positioning, market-leading product and inventory, we believe that Groupon should be best positioned to become the de facto standard in local experiences. Last, on cost. We believe we can further strengthen our culture of operational efficiency. With the planned exit of goods and the opportunity to right-size the organization to align with the needs of our go-forward business, we believe we can deliver leverage in our cost structure over time as we grow the top line. In closing, I'm incredibly excited about the opportunity ahead of us. And while I know we have a lot of work to do, here's one of the data points that gives me confidence in our future. In North America, We have approximately 8 million customers that we'd consider our best customers. Our best customers in North America have a household income of $75,000 to $100,000, live in a city, and they love new experiences. They've told us that they like to keep busy, and when they're looking for something to do, they want to do it in their own neighborhood and in the near future. In 2019, they purchased approximately 58% of our total units, spent about $2.1 billion with us, and purchased about seven times on average. Just one more purchase from these best customers represents a $300 million opportunity in net operating bookings. Given the profile of this customer, driving their purchase frequency up by just one time per year is not hard to imagine. We also have 18 million active customers who look similar, and one more purchase from them is worth another approximately $450 million. In other words, we have valuable customers. They are loyal and engaged, and they're not going away. They've told us that they are looking for a go-to destination for local experiences, and that absolutely should be Groupon. Before I turn the call over, I'd like to cover some other exciting news. I'd like to officially welcome Valerie Mosley and Helen Vade, who have been elected to our Board of Directors, and Richard Mirage of MIG Capital, who has been appointed as a Board Advisor. All three bring unique and valuable perspectives and will be great assets as we move through this transformation. I'm also very happy that Melissa Thomas will become our permanent CFO. Melissa has long been a key part of our senior team, and I'm thrilled to have her take on this expanded role permanently. With that, Melissa will take you through the fourth quarter.