Groupon, Inc.

Please stand by. We're about to begin. Good day, everyone, and welcome to Groupon's fourth quarter 2022 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. Again, that's star one to ask a question. And just a reminder, today's conference is being recorded. And now for opening remarks, I would like to turn the call over to the Chief Communications Officer, Jennifer Bugelman. Jennifer, please go ahead.

Hello, and welcome to Groupon's fourth quarter 2022 financial results conference call. On the call today are CEO, Kedar Deshpande, and CFO, Damian Schmitz. The following discussion and responses to your questions reflect management's views as of today, March 16, 2023 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. On the call today, we will also discuss the following non-GAAP financial measures, adjusted EBITDA, adjusted EBITDA margin, non-GAAP SG&A, 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. Unless otherwise noted, all comparisons to 2019 results are provided on an FX-neutral basis. And with that, I'm happy to turn the call over to Kedar.

Hello, and thanks for joining us for our fourth quarter 2022 earnings calls. In the fourth quarter, we delivered local billings of $366 million, up 6% compared with the third quarter. While we drove a sequential improvement from the third to fourth quarter, there is no way to sugarcoat it. Our results for our local category were disappointing. Though local billings performance was better in November, our business began experiencing significant headwinds in December, and as you will hear us discuss, these headwinds continued in early 2023. We are not living up to our full potential today, but we are taking steps to transform our business, improve profitability, and grow our marketplace. To drive our business forward, we are focused on three areas. improving the supply side of our marketplace to drive customer demand, leveraging an improved inventory base to make our marketing and promotional spend more efficient, and doing both of these against a backdrop of a meaningfully streamlined cost structure and much better operational rigor. To begin, let's start with the cost structure. This is an area where we have already made notable progress. Last year, we launched a plan to reduce expenses and align our cost base with where the business is today. We have substantially achieved our phase one goal to reduce our cost base by $150 million annually. Our phase one actions were oriented towards sales, the completion of our migration to the cloud, and right sizing of our facilities footprint. When we announced phase one, we also committed to taking another 50 million of costs out by the end of 2023. Given our recent business performance, we have decided to accelerate and expand this phase two of restructuring. Our plan is now to reduce our cost structure by an additional $100 million annually, which is two times the size of our original cost reduction plan. Our phase two savings will primarily relate to payroll reductions, which we will achieve by eliminating approximately 500 positions globally. The majority of these reductions should be done by the end of second quarter of 2023. The remaining savings are related to non-payroll cost actions, such as reducing our technology, software, and professional services costs. We have also finished our migration to the cloud. Moving forward, we will be focused on reducing the number of services that we are hosting in the cloud. We believe there is an opportunity for us to save even more in the years ahead, potentially cutting our cloud spend in half. As we execute on our transformation strategy, our low cost structure should allow us to achieve significant operating leverage. This means that we should be able to generate positive adjusted EBITDA and free cash flow going forward once our phase two actions are complete, even at current local marketplace volume levels. And as we grow our local marketplace, revenue flow through should improve sustainably. Now that we have gone through the process of taking costs out of the business, we are also making sure we have the right processes and operating rigor in place keep our cost structure tight while we continue to look for ways to strategically reduce cost in the future. To support this effort, we have established a transformation office that is focused on creating an action-oriented culture that rewards performance, ownership, and frugality, ensuring leadership is accountable with new operating structure, and finally, further reducing costs and streamlining business processes. So that's how we are stabilizing the business. Now let's talk about our growth plan, which starts with improving the inventory on our marketplace. We must ensure that we meet our customer's needs every single time they come to our marketplace so that we can drive local purchase frequency. And over the last few quarters, we have been focused on aligning on the best strategy to do this. Last quarter, we talked to you about a number of initiatives, including Groupon incentives, CLO, personalized promotion, and changes to search and relevance. We use the Atlanta test market to test all these initiatives together. Let me give you a few insights into what we learned. The biggest takeaway is that we learned that we can leverage small incentives, such as Groupon Bucks, to stimulate customer demand. That said, while we were able to drive purchase frequency up by as much as 14% during our Atlanta test using Groupon Bucks incentives, there were limitations, meaning that we encountered challenges in sustaining this level of purchase frequency improvement. While many customers came back a second time to use the Groupon Bucks, many did not come back a third or fourth time to make purchase on our marketplace. Why? Because we did not have the inventory they were looking for. The incentives were not enough to compel consumers to make purchase just because they received a discount. Not if our inventory did not match their search intent. So in order for these incentives to work and drive purchase frequency higher, we must build an inventory base that delivers the experiences and services our customers want all the time. These results and learnings have directly informed our sales-led transformation strategy. We are leveraging empirical internal and external data from these tests, sources, to power our efforts. Our goal is simple. We want to build a more inspiring inventory base that engages customer and drives purchase frequency. Once we have the right inventory, we can use the strategies and tools such as Groupon incentives, new search and relevance breakthroughs, et cetera, to accelerate our progress further. Future success for the Groupon marketplace starts with supply. If we win the right supply and expand our selection of fresh new offerings, we believe demand will follow. While Groupon has a scaled local marketplace, recently our inventory acquisition strategy has not been driven by consumer demand. And as a result, considerable amount of the inventory we have on our marketplace today is not being purchased by customers. In fact, in 2022, over 75% of our deals in North America marketplace sold fewer than 10 units each month. Having the right inventory is mission critical to both driving consumer demand and creating a positive merchant experience on our platform. So for 2023, in addition to leveraging self-service for acquiring new merchants, Our goal is to leverage our sales force to acquire more high value merchants. Our new merchant acquisition strategy will be centered on fulfilling consumer intent by acquiring higher quality inventory that we know consumers want instead of acquiring more for the sake of more. To do this, we are implementing a hyperlocal merchant acquisition approach, which is focused on acquiring the right merchant in the right category, the right location, and with the right deal structure. In the first step of our hyperlocal approach, we are prioritizing merchant acquisition in our top five US markets, New York, Chicago, LA, Washington DC, and Phoenix. Once we have proof of the concept, we expect to expand This hyperlocal approach to other North America and European capitals. Our top priorities in each market are to identify and acquire high quality local merchants in categories with unfulfilled intent, as well as acquire highly compelling national deals from well-known merchants to drive consumer engagement on our platform. To do this, Each of our top markets will be led by a CTCEO who will be responsible for leading inventory acquisition and management and the performance of overall market. To optimize inventory acquisition, we have implemented a number of new initiatives in each of our top markets. First, we are refining our sales acquisition process to ensure our sales teams are going after the highest quality supply. Sales reps now have very specific target merchants they're responsible for acquiring by vertical and geographic location. We are also providing our sales reps with customized deal structure recommendations for prospects to help them bring new merchants onto our platform. This is departure from our previous structure when the sales reps had the freedom to bring on any merchant with any deal structure and still make their sales quotas. Second, we are aligning the sales compensation to the performance of the deals and merchants they bring on the marketplace. In other words, they will be compensated based on the output of their deals, not just the number of deals launched or merchants acquired. To give you a little color so far, we have already seen the outperformance of these new curated deals in our top markets. These curated deals are the ones that are receiving special attention from our sales teams, from deal structure to deal copy. And as a result, customers are responding. We have seen solid increases in conversion and unit velocity and new customer acquisition on our first handful of deals. Additionally, we have also refined our approach to retaining merchants and deals with a similar focus on quality. Our sales compensation plans related to merchant retentions are also now focused on retaining high-quality deal structures year over year. As we improve our inventory, we believe customer demand will also rebound. top initiatives to create a better customer experience include leveraging an improved inventory base to power better search and relevance and recommendations, and continuing to enhance customer service interactions and reduce refunds, which should yield better customer trust in our marketplace. We are beginning to see a positive trend emerge with refund rates, which we believe will continue to help improve the trust in our marketplace. Over the past year, refund rates have improved in North America and international, and we are focused on reducing them even further going forward. If we were to successful in transforming our inventory base, we believe we can significantly improve the performance of new merchants this year. Our goal is to increase billings and gross profit per new merchant by more than 20%. In addition, currently only 20% of local deals in our marketplace sell more than 10 vouchers per month. Our goal for the new deals we are onboarding is to ensure that more than 20% of these deals sell 10 plus vouchers per month. If we are successful in our supplier transformation, we believe we can increase consumer purchase frequency to north of 3x per year. These goals are just the start in our opinion. Once we gain traction with our bigger top merchants, we intend to build on this success throughout the rest of the marketplace. We believe that this will allow us to unlock our marketplace flywheel. As we improve our inventory by connecting it more directly to consumer intent and drive organic demand, we can reduce our marketing and promotional spend while driving higher return on investment. Overall, our goal is to reduce our marketing expense to less than 25% of our gross profit in 2023. Opportunistically, reallocate our marketing budget to higher return channels and lean into more personalized promotions and pricing to reduce our promotional spend while at the same time driving incremental sales. We believe that successful execution in these areas will allow us to return the company to growth and allow us to deliver positive adjusted EBITDA even on a reduced revenue base. While we haven't lived up to our potential, our marketplace opportunity remains immense and we believe we are taking the right steps to not only stabilize the business but create a roadmap for growth given the work we have done and opportunities that lay ahead of us we believe that we are well positioned to create value for our customers merchants employees and shareholders with that i will turn it over to damien to walk you through our q4 results