Groupon, Inc.

G'day everyone and welcome to Groupon's third quarter 2020 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 Chief Communications Officer, Jennifer Bugelman. Please go ahead.

Good morning and welcome to Groupon's third quarter 2020 financial results conference call. With me 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, November 6, 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 risk 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 for the year ended December 31, 2019, and subsequent quarterly reports on Form 10-Q. 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. 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.

Thanks, Jennifer, and hello, everyone. We appreciate you joining us today, and we hope everyone is staying safe and healthy. As the world continues to be impacted by the COVID-19 pandemic, I'm reminded every day of the positive impact Groupon has on small businesses around the world. Groupon connects millions of customers and local merchants, and we believe that during this crisis, we have a big opportunity to help small businesses navigate through the pandemic and beyond. And this opportunity is large. We estimate our addressable market to be north of one trillion, and we are already a market leader. In fact, just to give you a sense of our scale, in the third We've sold over 12 million local units and our North American customers have spent nearly $20 million on massages, over $15 million on Botox services, and tens of millions on leisure activities in their local neighborhoods. Today, I'm excited to give you an update on how we're executing on our strategy to take share in the local market and return Groupon to growth. But first, I want to take a moment to highlight our third quarter results. On our second quarter call, we showed you proof points that demonstrated the durability of our model, even in the midst of COVID, and we continue to build on this foundation in the third quarter. Looking at how far we've come since just the first quarter gives us confidence that we can continue to deliver the results we need to drive the business forward. To put this into perspective, we've gone from local units being down approximately 80% and an adjusted EBITDA loss of $22 million to local units recovering meaningfully, delivering $31 million of adjusted EBITDA in the third quarter and near break-even cash flow. We posted a 40% sequential improvement in local gross profit first to second quarter and are benefiting from our success in right-sizing the costs associated with our goods category. Bottom line, we believe these results provide a glimpse of our future success in local. While our overall business is still feeling the impact of COVID and there's a lot of work to be done, we are confident in the strength of both our business and financial models. We are executing on a growth strategy focused on driving customer purchase frequency and unlocking our marketplace flywheel, and we believe we can create significant value. Delivering on our core merchant and customer value propositions is at the center of our growth strategy. To do this, we need to move beyond our incumbent high-cost model that requires merchant We need to give merchants new, more tailored ways of working with Groupon, which will remove the barriers for merchants to use Groupon as an always-on sales channel. And, with expanded inventory, we will give customers a reason to visit and purchase from Groupon, more frequently than our historical average of approximately 3.5 times per year. As discussed in the last quarter, we have a strategy to build more quality inventory for customers and to provide merchants with a business model that creates an economically viable way for them to work with Groupon across their entire inventory of services. We intend to deliver more quality inventory by focusing on three types of inventory. Deals with very few restrictions, new, lower discount offers, and market rate supply. Early in the third quarter, we began testing this combination of inventory types in floor markets. We believe this inventory growth will lead to low single digit percentage point improvements for units and billings by the end of the six month test. We don't intend to scale the full scope of our strategy to more markets until we get signal. Along the way, We'll be looking to learn more about how customers and merchants want to engage with Groupon and how we need to continue to shape our marketplace to meet future demands. After only three months, we have learned a lot. We get feedback from our merchants on a weekly basis, and we're making observations about our customer behavior. And we're quickly integrating these insights into our go-to-market approach. Let me give you a few examples. We've discovered that we can reduce and remove restrictions from deals more quickly than originally anticipated. In fact, 90% of our new merchant inventory listings in test markets carry no restrictions. Based on this, we're looking at how we can scale our efforts to remove or reduce restrictions across a wider range of inventory now, beyond just our four test markets. Second, we've learned the importance of leading with the complete Groupon package in our sales page. We've had a far more transactional pitch focused on closing only one or two services at a high discount and high margin that we thought would perform best on Groupon. Our new inventory listing options have now made it feasible for merchants to list their entire menu on Groupon whether through an unrestricted deal or a low discount offer, which provides them with more options that work for their business objectives. As a result, We've adapted our pitch to be far more consultative, which includes reviewing the merchant's entire menu of services and understanding how their objectives vary by service and then suggesting the best way they should work with Groupon. As we talk about last quarter, we knew that ramping up our inventory tests during COVID could be challenging. From the start, our focus has been on to control what we can and try to mitigate the impact of factors outside our control wherever possible. This focus is evident when you look at how well we are executing in our beauty and wellness vertical. Given the nature of the services these merchants offer, as well as the current COVID-related restrictions, these merchants are best positioned to adopt a full catalog approach, remove restrictions, and provide bookable services. And we are doing what we can to position Groupon to benefit from this vertical's recovery. We are very excited by the results we've seen, which give us confidence that we are headed in the right direction. For example, within our test markets, beauty and loneliness listings per merchant have grown 40% and we've been able to meaningfully accelerate booking tool adoption. And roughly one-third of the new beauty and loneliness merchants in our test markets have joined the Groupon marketplace with bookable inventory. These early wins are encouraging because we believe our purchase frequency in this vertical is below where it should be, given how often the average customer engages in these types of activities. Thank you for joining us. While beauty and wellness has a built-in frequency driver given how customers naturally interact with these types of services, the dynamic in our things to do vertical is a bit different with COVID-19 restrictions having a bigger impact. Despite this challenge, we are tracking well to our goal of increasing inventory in our test markets by 25 to 50% as soon as possible. And to date, we've increased our inventory by about 50% in our test markets first control. So let me provide some context for what scaling our test could mean as we look ahead to 2021. While early, our merchants are responding to our expanded inventory options, including the introduction of offers. This gives us confidence that we can deliver a fundamentally better customer and merchant value proposition and drive growth. Once we have the right level of signal, we also believe we will be able to scale our strategy relatively quickly and reach an inflection point for growth shortly thereafter. One factor that gives us confidence on this front is the sales momentum we believe we can build. By removing restrictions, introducing more inventory options, and increasing bookability, we can quickly change the customer experience. To date, approximately 25% of our top duty and wellness merchants in our test markets have agreed to list their full catalogs without restrictions and make them fully bookable. This is creating new experience for customers by significantly reducing We believe that this, coupled with marketing campaigns focused on driving customer awareness, will reduce barriers for customers and drive purchase frequency. To that end, we are also launching new marketing campaigns within our four test markets. We are already a well-known brand with millions of customers who love Groupon, but far too many still view us as only an inspiration marketplace. We are testing campaigns that focus on repositioning Groupon as a marketplace that now has more of the inventory customers are looking for. We've also developed unique customer journeys, incentives, and promotions that we believe will be important drivers of our ultimate goal, increasing customer purchase frequency. While inventory growth and progress within our inventory test has been our top priority, we have also continued to improve the customer and merchant experiences. On the merchant experience side, we're focusing on positioning Groupon as a trusted partner merchants can turn to as they're launching or growing their business. We have a unique opportunity to reset the merchant perspective as they continue to face COVID-related challenges and better tools are a big part of this. Let me describe a few of the launches that I'm most excited about on the merchant side. First, we launched several enhancements to our self-service tool now called Campaign Builder. This tool allows merchants to manage their inventory listings, including copy, images of their services and facility, and data-driven intelligent pricing recommendations and insights. One of the most important features of this launch is that a merchant can take a new listing live in less than 24 hours. We are also working on functionality that will make it seamless for merchants to convert deals to offers and vice versa, allowing them to efficiently manage their coupon inventory and demand.