Groupon, Inc.

Good day, everyone, and welcome to Groupon's second quarter 2021 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 remarketing. Press the star key followed by the number 1 on your touch-tone phone. Once again, that's star 1 to ask a question. Today's conference call is being recorded. For opening remarks, I would love to turn the call over to the Chief Communications Officer, Jennifer Beigelman. Please go ahead.

On second quarter 2021 financial results conference call. On the call today are CFO Melissa Thomas. The following discussion and responses to your questions reflect management 2021 only and will include forward-looking statements. We encourage investors to use our investor relations website at investors.groupon.com as a way to easily meet. Groupon promptly makes available on this website or furnishes with the SEC and select press releases and social media posting. On the call today, we will also discuss the following non-GAAP financial results, 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 book 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 good morning, everyone. It has been an exciting first half of 2021 at Groupon, and I'm pleased... Thank you for joining us. which was stable compared to the first quarter and is an important milestone that you'll hear more about from Melissa later in the call. For our international business, in the second quarter, countries began relaxing COVID restrictions as vaccinations accelerated, and in June, international local billings reached the highest recovery rate since the onset of Wave 2 in October 2020. International local billings also stepped up nicely quarter over quarter, growing nearly 30% in the second quarter versus the first quarter. but similar to what we've seen in North America, we expect performance to ebb and flow across international markets. And as we've said before, we expect a longer recovery cycle in international where restrictions have been more prolonged and stricter and the vaccination rollout has been slower. As we leverage these macro recovery trends to our advantage, we are also continuing to execute on our growth strategy. We told you that our goal was to grow high quality local inventory. So far, Our efforts have centered around growing offers inventory within beauty and wellness and removing restrictions on deals across the marketplace. We've also begun to modernize our marketplace with a new customer experience and new feature sets for our merchants, including expanded self-service. Overall, despite the overhang of the pandemic, we are seeing green shoots that give us confidence in our ability to reshape Groupon into a destination for local experiences, which we believe will provide a foundation for growth in the years to come. Our growth thesis is rooted in our ability to deliver the value propositions our customers and merchants want. Everything we are doing is focused on improving these value propositions. We want to improve the ease with which merchants can interact with the Groupon marketplace, extend their reach to new and existing customers, and give them the monetization levels they need to achieve healthy unit economics. Likewise, for customers, we intend to expand our wallet share by giving them the value, selection, and convenience they want. Expanding our inventory is a key element of our growth strategy, and our teams have been making meaningful progress on two fronts. Bringing back pre-COVID supply to our marketplace and growing offers and repeatable inventory. First, let me touch on the team's progress on bringing merchants, particularly top merchants, from 2019 back to the marketplace. Many of you have been asking us about the health of our merchant base, so I wanted to provide you with some additional color to highlight our progress to date. My comments will focus on North America, which is leading the way. When we think about recovery on our merchant base, we believe the fastest way for us to re-energize our local category is to reactivate our top supply. So, we have placed a lot of focus on this goal, and our efforts are beginning to pay off. At this point, we have brought many of our top merchants back to the marketplace. While we are encouraged by our progress in bringing these merchants back and retaining them, we know we have to move this number even higher. As I said, we're confident we can continue to do that, and here's why. First, our team is in active dialogue with our top merchants who are not yet back on the platform, and many of them are telling us they want to come back to Groupon, but the timing is not yet right. This is particularly true among our things-to-do merchants, which, on a billing basis, was our largest vertical in 2019. We are hearing from many of these merchants that there are capacity constraints, largely driven by labor shortages, lingering COVID restrictions, and high consumer demand. This has led to a supply-demand mismatch. However, other verticals, like Beauty & Wellness and Home & Auto, are more recovered, and we have more of these merchants back in the Groupon marketplace. We believe this demonstrates that they view Groupon as a valued partner. And, second, As we continue to engage with our top merchants, we are seeing top supply metrics improve weekly across all verticals. We believe merchant capacity constraints are transient and that we will successfully bring back top supply, although the timeline to achieve this will likely extend into next year. The great news on this front is that as our top merchants return, they will be returning to a fundamentally improved Groupon experience, one that does a better job of driving customers through their doors. You're hearing that we still have some work to do on this front, but our progress bringing top supply back on the platform is certainly trending in the right direction. To help you triangulate on why this is important, top supply recovery has been correlated with our bookings recovery in North America local. We believe that as high-quality merchants return to our marketplace, this is stimulating consumer demand. Beyond just our top merchants, we have broad supply with market-leading selection of local experiences that support the vibrancy of our marketplace. We are leveraging our sales team, self-service, and our inventory partnerships to continue to grow our inventory base and further strengthen our competitive position. While we are focused first and foremost on recovering our top supply, we are also doing all we can to help small businesses find their footing as they reopen their doors. We love seeing these local businesses come back and partner with us, which helps to strengthen our position as a destination for locals. So, we've talked a bit about recovery. Let me now switch gears and update you on our growth efforts. The team is making steady progress on our inventory initiatives, which we believe will allow us to transform our marketplace by growing high-quality local supply. As we've discussed in previous calls, in North America in 2021, we're focused on removing repeat restrictions on deals across all verticals and increasing the average number of listings per beauty and wellness merchant. I'm excited to announce that as of today's call, more than 70% of our deal inventory is now repeatable. This is an important milestone as we strive towards our long-term goal of increasing purchase frequency and overall marketplace velocity. Unrestricting deals will give consumers the opportunity to engage more frequently with more inventory through repeat purchases. While it is very early days, which means we haven't fully leaned into marketing these deals, We are encouraged that merchants who have lifted repeat restrictions saw an initial 2% lift in units per customer. We have also hit our goal to increase the average number of listings per beauty and wellness merchant. In the first half of 2021, we grew inventory within our North American beauty and wellness vertical with the majority of this growth driven by offers. In fact, listings per beauty and wellness merchant have grown over 20% since we launched offers, which means that on average, these merchants now have about four options for purchase in the Groupon Marketplace. Digging in one level deeper, beauty and wellness merchants who leverage offers have nearly four times more listings than merchants who only list deals. This further demonstrates that our merchant value proposition is resonating and our new offers product is unlocking Groupon's opportunity with beauty and wellness merchants. We will continue to focus on driving listings per merchant higher when and where it makes sense. Let me provide some additional context for how this progress is showing up in merchant and consumer behavior as well as our business. As we look at the four cities where we tested offers, Detroit, Denver, Dallas, and Seattle, during the second half of 2020, we can see the impact of offers. Offers have now been part of our sales pitch in these markets for about a year. We're still early, but we've seen a positive response from both sides of our marketplace. So here's where we are today. On the supply side, merchants are embracing offers. The initiatives we have in place are driving beauty and wellness supply growth in our marketplace. and we are testing these initiatives and others to power supply growth in other verticals. On the demand side, customers are also responding, particularly our high-intent customers. That said, again, we're still a bit early, and while we're seeing encouraging signals, we have work to do to unlock our full potential. It's also really important to keep in mind that our markets have yet to fully benefit from our new customer experience for marketing investment. The pandemic has created a lot of noise, and there's a lot of seasonality that makes measuring incrementality difficult. Remember, however, that we've tackled the two root causes that have prevented customers from doing more with us. We've unrestricted supply, which now allows customers to buy more than 70% of our inventory again and again, and we've systematically gone after full menu with merchants so they can do more with us and help give customers the broader selection of experiences they want. These are fundamental challenges that we had to overcome. Bottom line, we have high conviction that unrestricting inventory and providing new inventory products will help us drive demand over time. As we continue to scale elements of our growth strategy, we're positioned to leverage these elements throughout our business to create even more opportunities to drive growth, such as launching new products focused on driving frequency, rolling out new branding, and exploring new ways to attract loyal customers. Now that we are beginning to make substantial progress both for covering our pre-COVID supply and unlocking merchants' potential to do more with Groupon, we're ready to leverage proven marketplace tactics like inventory multipacks and other merchandising initiatives that were not possible before. Let me take you through how we are leveraging these marketplace tactics within our strategic priority to modernize the marketplace experience for merchants and customers alike. Let's start with the merchant experience. We're leveraging technology across our merchant platform to deliver the ease, reach, and monetization that local businesses want from Groupon. We have launched new features to significantly improve our self-service capabilities and it is now much easier for our merchants to create, update, and optimize listings. In short, Groupon is becoming a better partner to our local merchants around the globe. A best-in-class self-service option solves two key challenges for us. Number one, it addresses a key merchant pain point. And number two, it creates leverage for our sales team as we expand our local inventory. New and existing merchants alike are transitioning seamlessly to our self-service platform. Let me provide a little color on how self-service is beginning to show up in our merchant data. In the past 12 months, we've made strong progress getting merchants to adopt self-service. In the second quarter alone, nearly 50% of the deals launched in North America were launched via self-service. We expect this number to continue to grow over time. Moving forward, we believe self-service will be an important and standard way for merchants to interact with Groupon. Now that we have made significant progress optimizing our merchant platform to handle standard business operations, we are moving to enhance our feature set with capabilities that are unique to Groupon and our opportunities. For example, in the fourth quarter of 2020, we launched a new recommendations feature which is beginning to deliver results. Among our top merchants, those that have leveraged our recommendations realized nearly 20% more bookings versus merchants who did not. In late June, we launched a significant new recommendations feature set, the Merchant Advisor, a tool that further strengthens our ability to give our merchants more strategic campaign recommendations to drive growth. This new feature dynamically analyzes merchant campaign performance and provides bespoke recommendations that help merchants manage their entire portfolio of listings. We plan to scale this to all merchants in the third quarter and believe it will provide merchants with even more actionable insights to drive growth, a win-win for both merchants and Groupon. In addition to self-service, we are also leveraging partnerships and integrations when we see an opportunity to accelerate improvements to the Groupon merchant experience. A great example of this is our new partnership with Booksy, a popular beauty and wellness appointment app. Now, existing Booksy merchants can easily connect their inventory to the Groupon marketplace, and Groupon will be able to offer our merchants free access to Booksy's suite of scheduling and business management tools. Bookable inventory is an important characteristic of high-quality supply. and these types of partnerships can help accelerate growth of our bookable inventory while also enhancing the customer experience. Offering a portfolio of free and paid merchant services is part of our overarching long-term strategy to provide merchants with a full service platform that they can leverage to build and grow their businesses. This is a great segue into our progress modernizing the customer experience. By now, many of you in North America have interacted with our new customer experience. As a reminder, our overarching goal with the new experience is to drive sell-through of our expanding inventory base, grow purchase frequency over time, and begin to bend the customer perception of Groupon from an inspiration-only marketplace to a destination for local experiences. We want to deliver a modern, engaging, personalized discovery experience that will give consumers highly relevant search results and recommendations to consider and interact with that will help drive conversion over the long run and drive more customer engagement with our content, which should also lead to an increase in purchase frequency. With millions of consumers coming to Groupon every day and interacting with our homepage, We have a unique opportunity to educate consumers and how they can leverage our platform to explore the world around them and participate in the 80-plus couponable moments happening every year. We've made a lot of progress on this mission-critical initiative, and as of last week, our new customer experience has been launched to 100% of North American users across the app, mobile web, and desktop. A huge shout-out to our product and engineering teams for all their hard work to get this new CX launched. We haven't profoundly changed our customer experience in over five years, and this launch is an important point in our journey to becoming a destination for local. In addition, it was also completed in a much shorter timeframe than any previous changes, going from concept to delivery in just six months. Let me share a few early learnings 90 days post-launch. We were prepared to see a typical drop in conversion rate that usually happens when you launch a new CX. And while conversion rates are still below pre-launch levels, We've been encouraged to see the impact of conversion was less than anticipated and we've seen conversion improve steadily since launch. Engagement is also a bright spot for us. We're seeing customers spend more time engaging with our marketplace. Our homepage bounce rate has gone down and category page views have gone up as customers spend more time browsing and exploring local experiences. Finally, the early read on our likelihood to purchase survey indicates that our new CX is helping to shift our brand perception. While based on a small sample size, through this data we have seen that our new experience is outperforming our old experiences as customers tell us that Groupon is showing them the businesses and listings they're interested in and helping them discover new experiences. In terms of what's next for our new CX, this recent launch is only the beginning. Now that we have unlocked new inventory growth avenues and have launched a foundational new user experience that is local first and showcases Groupon as a destination marketplace, we're focused on improving the way we surface full menu inventory options and building and launching more features to drive more engagement and repeat purchases. One example of how our inventory, merchant, and customer initiatives are coming together to pave the path forward for the new Groupon is our recent pilot of Inventory Multipacks. which allows customers to buy multiple experiences in a single purchase from a merchant at a discounted price. We're exploring how we can leverage multipacks and eventually bundles to drive unit growth. While this product is still in early development, the initial read from customers has been positive, leading us to believe that we can capture additional wallet share. Less than a year ago, a product like this would have not been possible. We've been able to create an entirely new product that speaks directly to our merchant and customer value propositions. And, as I mentioned, we believe this is only the beginning. With our progress on the inventory front and the rollout of our new CX in North America, and as local communities continue to reopen around the world, we've begun to lean into marketing to maximize the impact of our progress. As we look to re-educate customers and expand the perception of our brand from an episodic, inspirational marketplace to a destination marketplace, We are being strategic with our marketing investment, and we are focusing on deploying resources in a balanced way to make all parts of the funnel work harder. Being strategic also means that we'll continue to assess the impact from the Delta variant and pandemic-related constraints. In the second quarter, we continued moving our spend up the marketing funnel with the ultimate aim of reshaping our brand perception as a destination for local. We saw some great results with our mid-funnel efforts and tested new channels to reach a new, younger audience. We've also begun to showcase and leverage our brand repositioning through creative marketing. This week, we launched our new brand campaign, Grab Life by the Groupon, asking people to choose whether to accept life as it is or grab life like their life depends on it. This campaign brings our inventory and marketplace modernization work to life, and we're excited about this campaign's potential among customers who are ready to get out and explore their local communities. Before I turn the call over to Melissa, I want to take a step back and remind everyone of everything we're doing to transform the Groupon marketplace. If you look back over the past 10 years, Groupon was really only able to offer one local inventory product, deals. Merchants had only one way to interact with Groupon, and there was no opportunity for them to do more with us. And with only one product and limited purchasable inventory, we trained customers to think about us only episodically. We fundamentally altered the customer merchant value propositions over the course of just the last year, and we're bringing our merchants the ease, reach, and monetization they need to help their businesses succeed with Groupon in giving our customers the value selection convenience that they want. As we've shared today, we've already made significant progress rolling out our new value propositions. It will take time to influence the hearts and minds of our customers, given our long-standing reputation as an inspiration-only marketplace, Thanks, Aaron, and thanks to everyone who's joining us today.