Groupon Inc (GRPN) Q3 2021 Earnings Call Transcript

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Groupon Inc (GRPN 0.74%)
Q3 2021 Earnings Call
Nov 5, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Groupon's Third Quarter 2021 Financial Results Conference Call. [Operator Instructions] A question-and-answer session will follow the company's formal remarks. [Operator Instructions]

For opening remarks, I would like to turn the call over to the Chief Communications Officer, Jennifer Beugelmans. Please go ahead.

Jennifer Beugelmans -- Chief Communications Officer

Good morning and welcome to Groupon's third quarter 2021 financial results conference call. On the call today, our Interim CEO, Aaron Cooper; and Interim CFO, Damien Schmitz.

The following discussion and responses to your questions reflect management's views as of today, November 5th, 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 and quarterly report 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'll find additional disclosures regarding the non-GAAP measures, including reconciliations of these measures to the most comparable measures under US GAAP.

And with that, I'm happy to turn the call over to Aaron.

Aaron Cooper -- Interim Chief Executive Officer

Good morning, everyone, and thank you for joining us to talk about our third quarter results. Today, I'm excited to give you an update on the progress we're making on our strategy to take share in the local market. But first let's take a step back and reflect on our progress this year. When we kicked up 2021 we told you we needed to execute in a few key areas this year and then doing so would be both indicative of important progress and foundational for future growth.

We told you that we need to unrestrict our deal inventory, later you'll hear data that shows we've done just that. We told you we needed to scale offers in Beauty & Wellness and again you'll hear that we've hit our goal there too. You'll also hear that we've begun to see impact. You'll hear evidence that strongly suggests that we can bend both the customer and merchant perception of the Groupon marketplace and create value for our stakeholders. We recognize the COVID is creating a lot of noise.

So let me walk you through our progress and the reasons to believe starting with a few highlights on our financial performance in the third quarter. Local represented 76% of our global billings, demonstrating our continued focus on this category and despite the impact from the Delta variant, we generated $553 million in billings, $214 million in revenue and $35 million of adjusted EBITDA. Solid indicators that we remain on the path of recovery.

At the same time we are executing against our strategy to unlock velocity in our marketplace. Over the past year, we've done a lot of work to identify and deliver on our merchant and customer value propositions and the changes we've made are the most significant fundamental changes we've made to our marketplace offering in over 10-years. We believe these changes will encourage our customers and merchants to do more with us. And in turn we think these changes will allow Groupon to do more, take market share, drive profitability and expand our long-term growth horizon. So what exactly have we done?

Let's start with our merchant value proposition. We have improved the ease with which merchants can interact with the Groupon marketplace. Extended the reach to new and existing customers and given them the monetization levels they need to achieve healthy unit economics. While we still have more work to do, we've made a lot of progress and I'll be sharing some key results in upcoming milestones in a few moments.

Likewise for our customers, we are focused on giving them the value, selection and convenience they want and believe we are on the right path to expanding our wallet share with them. We're still in the early stages of executing on our strategy to drive demand, but with the success we've had improving the merchant experience I believe we can accelerate our progress in '22. Why are we confident we have the right strategy in place? As we've rolled out our strategic priorities, we've been able to test and learn along the way.

Let me give you a few key operating results in the third quarter, which illustrate our progress. On the supply side, we continue to make progress bringing back pre-COVID supply to our marketplace. We also continue to make progress on initiatives to expand our inventory, merchants are adopting our flexible inventory listing options and we are removing repeat restrictions on more deals. On the demand side, we have early, but very encouraging results from our efforts to drive repeat purchases. I'll walk you through the impact later in my prepared remarks, but we are seeing unit growth from our unrestricted deal inventory that we believe set the stage for more progress in 2022.

Before we dive into our strategic progress, I want to start with a snapshot of our inventory base. Last quarter, I told you, we believe the fastest way for us to reenergize our local category is to reactivate our top supply and our team is doing just that. And for those top merchants yet to return, we feel really good about our prospects here. Our team is in active dialog with these merchants and the message from the majority of these merchants has been clear, it's not a matter of if they will return to Groupon, but a matter when they will return to Groupon, and this really matters and here's why.

In the third quarter alone, if these merchants who are mostly things to do merchants at the back on our marketplace. We believe we would have picked up between 10 and 12 percentage points of Local billings for 2019 levels in North America. In addition, we believe we are impacted by the delta variant in other transient COVID-related challenges. COVID has had a two-dimensional impact on our business: first, as COVID cases rise as with the delta variant people go outlets and interact with local merchants less. They get fewer massages and facials and eat in a bit more.

The second impact from COVID has taken a bit longer to fully resolve. Even when cases are down due to supply demand imbalances, some of our merchants are unable to serve existing demand. In these situations, these merchants don't want to run a Groupon campaign, which would drive more customers into their establishments and potentially exacerbate their capacity issues. But with line of sight to bring top merchants back to our platform, we feel confident about recovery, but of course we want to grow beyond recovery.

As I mentioned earlier, our growth strategies wouldn't in our belief, we should be capturing more of the 80 Grouponable moments that the average customer engages with annually. Quite simply, we believe we need to drive purchase frequency and unit velocity and this is where we connect back to our core merchant and customer value propositions. As we've discussed in the past to do this we're starting with wholesale changes to the way we work with merchants. We are giving merchants the opportunity to do more with us. In the past we gave merchants only one way to work with us deals. Now we have multiple inventory options at multiple prices, which gives merchants a dynamic way to list of full catalog with Groupon.

Since our test with offers, we've been scaling our offers inventory product for our Beauty & Wellness merchants. We continue to see merchants adopt offers in a way to expand their inventory at Groupon and in fact, those two leverage offers at nearly 4 times more listings than merchants, who only less deals. As a result beauty along inventory per merchant increased over 30% in North America, since we launched offers. Offers have expanded our Beauty & Wellness inventory, which we believe is important as we shape Groupon into the destination for local. The team is working to improve our customers interact with a full menu experience for merchants, which we believe will allow us to further monetize our expanded inventory selection.

Offers has been a great jumping-off point for us and are working well for Beauty & Wellness merchants. We are now leveraging what we've learned and exploring ways to give our merchants and other local categories more flexibility. One thing that will become clear, merchants do want to do more with Groupon and letting them have more flexibility in how they work with us is an important part of our relationship.

Let me give you a case study to bring this to life. One of our top merchants is a large Theme Park by giving them more flexible inventory options, we've allowed them to begin leveraging Groupon marketplace as it always on sales channel. Their listing more days in inventory across our various park locations and leveraging sponsored listings to reach more customers. In addition, we've integrated the revenue management system with the Groupon platform, so that they can dynamically price each of their Groupon campaigns, this has led to a big impact. For year-to-date gross bookings with the Groupon have grown over 20% versus 2019 and keep in mind that these great results are despite the merchant being impacted by labor shortages and excess demand this summer.

As we allow merchants do more with us, we are also making it significantly easier for them to work with us. Merchants both large and small are transitioning seamlessly to self-service, which is quickly becoming the primary way that merchants are launching campaigns on the Groupon marketplace. In the third quarter over 50% of deals launched in North America were done via self service. To put the progress we've made into perspective in all of 2019 just 8% of our deals were launched via self-service in North America. And self-service adoption is even higher among our smaller merchants, who launched approximately 80% of their deals via self-service in the quarter, up 20 percentage points from the second quarter.

We are also striking new partnerships that we believe will enhance our merchant value proposition and help accelerate our progress. Earlier this week, we announced a new US distribution partnership with Google Pay, which will give Google Pay mobile app users direct access to unique local experiences available in the Groupon marketplace. We expect this partnership to be in market in the first half of 2022. The new partnership will expand our ability to help merchants to reach new customers and also make it easier for more customers to tap into the 1,000s of local experiences available in the Groupon marketplace. Our goal with partnerships like Google Pay is to bring more demand to our platform or bring our deals to platforms where more customers are in an effort to increase purchase frequency.

If our 2020 customer base bought just one more Groupon annually it would amount to a billion dollars of addition of billings. Beyond our current customer base partnerships like this one with Google Pay have the potential to meaningfully expand our customer reach over time. And today, we announced an exciting new partnership with Square, an important local commerce player that allows local merchants to easily create Groupon campaigns directly from the Square app marketplace and leverage the booking capabilities of Square appointments for their Groupon campaign. This partnership is an great example of how we're attacking the opportunity to bring more high quality bookable inventory to the Groupon marketplace and reduce merchant acquisition costs. Better, still we believe this partnership will help merchants attract new customers.

We are excited to partner with market leading brands of Square and Google Pay and we look forward to exploring other ways to provide our merchants with a full-service platform that they can leverage to build and grow their business. With the foundational elements of our merchant value proposition and expanded supply in place, we are leveraging our new customer experience and strategic marketing investments to expand the perception of our brand from an episodic inspirational marketplace to a destination marketplace.

Earlier this year we launched a new customer experience that is grounded in helping customers engage more meaningfully with local inventory. Our goal is to deliver more modern, engaging, personalized discovery experience that will give customers highly relevant search results and recommendations. While it's being just a few months since we fully scaled our new customer experience in North America, we've had a number of early ones. Pounds rates continue to improve, customers are spending more time browsing and exploring our local experiences and customers are telling us they're more likely to make a purchase on Groupon, than they were prior to the launch of our new CX.

While we're proud of what the team has accomplished in such a short period of time with the new CX, they are just getting started. There's lots of opportunities to optimize the customer experience and we expect to roll out more enhancements to further personalize the customer journey and drive repeat purchase frequency in the months and quarters ahead.

Along with our CX marketing is playing a pivotal role in driving demand. Had recovery began to take hold in North America this spring, we leaned into marketing to maximize the impact of our progress. And in the third quarter we began to strategically invest in both mid and upper funnel campaigns to drive consideration and awareness.

We launched our Grab Life by the Groupon brand repositioning campaign began influencer campaigns to expand our audience and reaching younger demographic and rolled out our new blog, The Gist to inspire discovered. With this move up funnel we got signal, but we were able to bend the perception of Groupon. Following the launch of our Grab Life by the Groupon brand campaign, we saw the most significant improvements to our brand perception that we've seen in quite some time. And we saw a lift in several key metrics such as consideration lesser [Phonetic] to recommend and purchase intent. Overtime, our goals is to take a full funnel approach as we believe we can make all parts of the funnel work harder and unlock growth.

So let's move on to demand. However our improved merchant and customer value proposition is working together to unlock demand. I told you earlier that in order to drive growth we believe we need to increase purchase frequency and unit velocity in our marketplace. One part of our thesis is that by unrestricting deals customers would make more repeat purchases. In the spring of this year, we began working with our merchants to make their deals repeatable. And as of today's call 75% of our North American deal inventory is now repeatable and we're on track to hit our goal of 80% by year-end.

At the same time we started our work to take Groupon from being an inspiration-only site to a destination marketplace for customers. We have told customers that not only do we have more of a selection that you want, but we will allow you to buy the experience as you love with Groupon again and again. And our thesis is proving correct. Since we began unrestricting deals in North America in April, we've seen a 7% lift in units per customer for approximately 700,000 customers, who have purchased local unrestricted deals, compared to customers who purchased restricted deals.

Keeping in mind that these results are from an early cohort. This is a big deal and signal that our strategy to drive purchase frequency is beginning to bear fruit. We still have more work to do to unlock the demand side of our marketplace. But this early win gives us a signal we need to scale other demand initiatives. For the last 10 years customers have been told that they could only buy a deal once with Groupon. So we are focused on reeducating customers to make sure they're aware that they can buy and buy again with Groupon.

In the fourth quarter we're rolling out a broad awareness campaign, which will prominently featured Buy it again banners throughout the customer journey and we are launching more targeted campaigns to customers, who have already purchased repeatable deals. We are also exploring ways to leverage proven marketplace merchandising capex to drive unit growth and the team is part at work laying the foundation to successfully scale multi-packs and eventually bundles in 2022.

As you've heard, we've made important progress on marketplace supply. We believe we are well positioned to accelerate demand in 2022 and beyond.

With that, I'll turn the call over to Damien to provide insights on our financial performance. Before I do, let me provide a few words of introduction. Damien has been a strong leader during his nine years on the Groupon team and has extensive experience in many areas of our global finance organization, as well as significant knowledge of our business history and opportunities.

I work closely with him throughout my career Groupon and I look forward to partnering with him as he takes on the role of Interim CFO. Damien?

Damien Schmitz -- Interim Chief Financial Officer

Thanks, Aaron, and thanks to everyone, who is joining us today. Today, I'll use my time to provide further insights into our third quarter operating and financial results and our updated 2021 financial guidance. In addition, in my prepared remarks, I encourage you to review our slides, which contain additional detail on our outlook for the remainder of the year.

Starting with our consolidated third quarter results, we delivered $553 million of gross billings, $214 million of revenue, $181 million of gross profit and $35 million of adjusted EBITDA. We ended the quarter with $177 million in cash. We continue to make progress rebuilding our North America Local customer base. We grew our active Local customers for the second consecutive quarter and nearly 90% of our new customers in the third quarter were high value global-only customers, this resulted in 4% quarter-over-quarter growth for active Local customers partially offsetting the decline in our lower value to its customers during the quarter.

While our total North America active customer count came in slightly below our second quarter balance everything that we're dealing, both for the merchant and customer is aimed at building a stronger, more valuable customer base. We are focused on growing our high value local customers and unlocking purchase frequency to capture more of customer wallet share and drive more demand to the Groupon merchants. Within international markets active customers have not yet stabilized given the more prolonged COVID headwinds there.

Next, I'll provide more insights into our third quarter results. Starting with our segment and category results. As we expected trends haven't been linear and recovery continues to ebb and flow with certain verticals and countries. Starting with North America Local billings were 62% of 2019 levels during the quarter. Looking at the trajectory intra-quarter Local billings as a percent of 2019 levels pulled back in mid-July with the emergence of the delta variant.

In International Local billings for the third quarter were 47% of 2019 levels on an FX-neutral basis, up 600 basis points versus the second quarter. And as we said before, we continue to expect a longer recovery cycle in International. Our third quarter Global Local gross profit benefited from $19 million of variable consideration from unredeemed vouchers that were sold in our prior period. The majority of this benefit was related to our International segment. We continue to observe redemption rates that were lower than our historical estimates for vouchers sold at the onset of COVID-19 pandemic.

That said, we're encouraged that redemption rates for bookings in recent periods has improved and we expect variable consideration to decrease meaningfully in the fourth quarter. I would also note that we've invested some of the favorability related to variable consideration into marketing in order to engage consumers more broadly.

Moving to our Goods category, performance here came in as expected. Goods continues to face known challenges, including the impact of iOS updates, as well as competitive dynamics, which further supports or de-emphasis on the category. I'm pleased to report that the international goods transitioned to a third-party marketplace model, which we began in the second quarter is approximately 85% complete and expected to be complete at the end of the year. Similar to North America is greatly simplifies the operations of our goods category and allows us to run goods with a leaner cost structure. As a reminder, in the third-party model, we recognized Goods revenue on a net basis.

Turning to operating expenses. Marketing expense was $53 million in the third quarter and reflects an increase in spend as we made investments in the mid and upper funnel campaigns to drive consideration and awareness. SG&A was $119 million, keep in mind as we think about the SG&A run rate on a go-forward basis, we do expect normal inflationary increases, such as merit and incremental expenses associated with our ongoing migration to the cloud.

Looking ahead to the fourth quarter and beyond, we remain laser focused on tackling the most important priorities. We believe that we're taking the right steps now to position Groupon for the long-term. In light of our third quarter performance, we are updating our full-year 2021 financial guidance. We now expect to deliver $130 million to $135 million of adjusted EBITDA for the full-year, and we expect to deliver between $950 million and $975 million of revenue for the full-year.

Let me provide some additional context around our updated full-year outlook. We expect global billings to moderately increase in Q4 versus Q3 and then global billings may continue to be impacted by factors outside of our control. Such as the level of seasonal local demand and COVID impacts on merchants and consumer behavior. Our outlook assumes third quarter performance levels for goods will continue throughout the remainder of the year and then we will complete our transition to a 3P model at the end of 2021.

Lastly, our antennas for marketing as a percent of gross profit in the fourth quarter to remain in mind third quarter spend levels. As a reminder, our 2021 outlook does not assume a material contribution from our growth strategy. Looking beyond 2021, we have line of sight to continued recovery next year and strong conviction that we are executing the right strategy to take share in local market. We are continuing to make progress, improving our high quality inventory and we are beginning to see a positive impact on consumer demand.

I'll now turn it back over to Aaron for some closing thoughts.

Aaron Cooper -- Interim Chief Executive Officer

Thanks, Damien. Based on everything we told you today, I hope it's clear that we're making substantial progress both in terms of recovery and our strategy. We believe we are well on our way to reposition Groupon to deliver on the promise of being a destination for local. We are showing customers how to do more Groupon and if they can come with [Phonetic] us for the value selection convenience they want.

Our local marketplace is simply better than it was before. We believe the increase in purchase frequency is the biggest unlock to driving velocity in our marketplace and increasing our share of wallet. And I'm so proud of what our team has accomplished over the last 18-months. We have the potential to drive strong long-term growth and I'm looking forward to seeing what we can accomplish.

And with that, open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Trevor Young from Barclays. Your line is open.

Trevor Young -- Barclays -- Analyst

Great, thanks. First one for Aaron on the two partnerships that you recently announced, clearly two different strategies there in terms of where the inventory ultimately steps. On the Google Pay distribution, I can see the benefits of merchants to get broader reach, but it would also seen that allowing a third-party to own more of the customer relationship outside of the Groupon surface. Do you have any concerns about that? And how should we think about potential future partnerships like this? Neither on the campaign enablement side like you did with Square or on the distribution side?

And then second one for Damien, any color on how Local unit or billings growth progressed throughout the quarter versus 2019 levels? And how that trended into October? Thank you.

Aaron Cooper -- Interim Chief Executive Officer

Thanks, Trevor. So let me take the first one then obviously we'll get Damien talks on your second question. As it relates to our partnerships Groupon is really a beloved brand, we have customers, who have been with us for years and are obviously spend a lot of times in money on the Groupon marketplace. As we look to extend our value propositions to our customers and merchants, key partnerships like Google Pay and Square are really important, and not just important to being able to drive volume to our merchants, but really through extending the value proposition. So with Google, we're going to be able to give users on the Google platform direct access to Groupon yields and that's also, as you point out, it's going to help merchants do a lot more what they want to do with Google -- with Groupon.

And then with Square, this is a chance for us to build upon what we've already done a lot of the partnership with Square is built on self-service. It's built on Groupon Connect, so that we just could not have done before. So now with more inventory, more repeatable inventory, more tools for merchants. Yes, you should expect us to do more and build on top of these partnerships. Damien?

Damien Schmitz -- Interim Chief Financial Officer

Yes. Thanks, Aaron. And [Indecipherable] some color commentary on the progression that we're seeing, but we saw the pull back from Delta variant late July and early August, and those are the biggest impacts that we felt overall, we're encouraged with what we're seeing thus far in October, which did improve from those low point earlier in the summer. But keep in mind as we think about the rest of the quarter, November and December generally play a larger role in the fourth quarter, particularly as consumer behavior shifting into a gifting season and we are cautiously optimistic about the unique opportunity for us to lean in here until Local gifting experiences, given the -- particularly given the disruption to the global supply chain.

That being said, you know, our guidance does contemplate an increase in billings quarter-on-quarter, but, you know, the -- our overall fourth quarter outlook does reflect the uncertainty and volatility created by Delta.

Aaron Cooper -- Interim Chief Executive Officer

Thanks for the question.

Trevor Young -- Barclays -- Analyst

Great, thanks guys, I appreciate the color.

Operator

[Operator Instructions]

Aaron Cooper -- Interim Chief Executive Officer

Let me let me go ahead and then also add just for Trevor's question to put it in broad context here, because the partnership that you'd asked about I think are important in the broader context for our customers, for our merchants for 10-years we've been one thing. And now what you've seen for Groupon over the last -- since a year and a half is significant changes, we've completely opened up our merchant value proposition, flexing in the self-service, which you've seen huge merchant adoption, more inventory options, which again you've seen significant adoption by our merchants and now giving -- of course giving customers' ability to buy and buy, again these are profound changes to just put, not have been possible with the old business model. And so you see real proof points coming through.

With merchants you see them trusting more and doing more, why? These are things that they expect from a marketplace and have long asked for -- from Groupon, that's why you see the significant uptick in each of the different components. And now with customers, you see customers start to vote with their wallet. The 7% lift that we share in those 700,000 customers engaged in our repeatable inventory is a really significant deal, this is customers voting saying, we want to do more with Groupon and they're starting to understand. I mean, it's not just about change in inventory, but about changing their perception, which is why the changes we made to the CX and our marketing were so important.

Finally, when Trevor asked about the partnerships, which also seek partners meaning in from both sides in the region was asked why? It's because of the uniqueness of our inventory, our inventory is something inventory that nobody else has when it shows up in the Google Pay app that is special for them. And then for these merchants that are on Square, we've given them an easy way just happened to Groupon demand. And I talk to a ton merchants and there is many of them, they know that they can't get this type of demand anywhere else. So for us, we see the opportunity is large. We're making a ton of progress. These are big changes in the short period of time and you should expect this to continue the scale these wins, more broadly in the business and see the benefits build on itself.

Operator

We have a question from Ygal Arounian from Wedbush Securities. Your line is open.

Chad Larkin -- Wedbush Securities -- Analyst

Hey, this is Chad on for Ygal. Quick one on partnerships, can you share any of the economics around them and how those work? And then any color you can give on the rollout of inventory scaling beyond the end of the year, when we can see it in more verticals in internationally?

Aaron Cooper -- Interim Chief Executive Officer

Yes, thanks for the question. So I'm not -- we're not going to share the partnership economics. But I mean you should understand that our goal here is in distribution, we're looking to low our merchant acquisition cost by making things of course easier for merchants and creating new merchant acquisition channels for ourselves and likewise similar on the customer side is the way we're thinking about these partnerships and extending our value proposition of the platform.

And I'm sorry and your second question?

Chad Larkin -- Wedbush Securities -- Analyst

Yes, just on the inventory scaling any update beyond at the end of the year here, expanding into new verticals into internationally?

Aaron Cooper -- Interim Chief Executive Officer

Yes, so what you should expect from us is just continued on what we've done and so if you continue -- expect us to continue, of course to hit our goals that we've already made significant progress on, that's rolling out offers and continuing to build. We already have the inventory growth that we've shared in Beauty & Wellness over 30%, we've partners of course are coming on with 4 times as much inventory.

Additionally, we shared an important data point here related to Q3 and what effectively is material, but transient COVID impact. What we expect to have [Technical Issues] merchants back on our platform that in Q3 we believe would have made up 10 to 12 points of overall local [Indecipherable], that's really material. And so if you add it together, both what we believe to be an extended recovery for Groupon with some of these merchants and then of course we have high confidence these are merchants that we talked to, we understand the revenue management or extend [Phonetic] exactly, why and when they will be back.

And with the benefits of the changes to the value proposition more ways to work with Groupon, more repeatable inventory, we expect these benefits to continue to build on themselves over the coming months and quarters. And then as we continue to see recovery at -- but international we will begin to roll out more of these features and business practices to our international marketplace.

Chad Larkin -- Wedbush Securities -- Analyst

Great, thanks.

Operator

[Operator Instructions] [Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Jennifer Beugelmans -- Chief Communications Officer

Aaron Cooper -- Interim Chief Executive Officer

Damien Schmitz -- Interim Chief Financial Officer

Trevor Young -- Barclays -- Analyst

Chad Larkin -- Wedbush Securities -- Analyst

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