Groupon, Inc. (GRPN) Earnings Call Transcript & Summary

Okay. I think with that, we'll get -- ready to get started for our first session of today. Thanks, everyone, for sticking with us. Here we are on day 4 of the Goldman Sachs Communacopia Technology Conference, and it's my pleasure to have the team from Groupon. We've got Kedar Deshpande, the CEO; we've got Damien Schmitz, the Interim CFO. Kedar, Damien, thanks for being part of the conference.

Thanks for having us, Eric.

Pleasure.

Okay. So I want to start maybe big picture. I think from 2 perspectives. One, you're still relatively new to the organization, and it's an organization that's going through a transition. Maybe talk a little bit about, for those who don't know in the audience or listening on the webcast, what you see is the journey that Groupon is on and how it sort of lines up with your new tenure in this role and how you see the next couple of years?

First of all, thanks for having us. It's great to be here. We -- I joined Groupon about 9 months ago, and 9 to 10 months is one of those times where it is becoming now, I'm new here is not the excuse anymore. So it's like, okay, what did we find out? So when I joined -- before joining Groupon, I came from Zappos, I was CEO of Zappos and joining in this company, it was great opportunity. Like you have this company with a large scale of customers. We had 15 million customers, and it was great and to see the traction with the customers, to see that we had local so many businesses, everything is working. And then the question is, why aren't we performing up to our potential? And then we hit Omicron and some bumps here and there. But the journey we are on is essentially how can we be the best experience for our local customers? Whenever you think of local, how can Groupon be the front end center of your mind? And Groupon started with this particular notion that, hey, I'm going to get the best deal. It's an episodic deal, oh, once you see the deal, you're going to be like, oh, I want to get into the deal. But the important part was what is the impression we are creating in customers' minds. What are we leaving them with the value proposition of. And that was a missing part of our journey. And so because you came in, we have great audience here.

We have a little fly joining us.

Could do that. But I think that's cool...

He has some questions for later.

Exactly, and we can address that. But going back, I think what we were trying to say is that local how can we make sure that customers, when they think of local, they think of Groupon. How can we be the destination for local services. Whenever you cannot be, oh, I'm going to be here today. I just got this particular deal on my, I don't know, haircut. And then next time, I've come back what is it going to be. So we want to be very consistent about our value proposition. And that value proposition is if you need any local service, we are going to be there at the best price and the best confidence, and that's the journey we are on. So there are elements that I can go through. But at the core of it, to we emphasize to our customers, a large number of customers that this is Groupon stands for. I can go to Groupon and I can find that service whatever I'm looking for in our neighborhood, reliably on Groupon at the best price, is the value proposition that we are trying to make sure that we carve with our customers.

Okay. So a lot of really interesting things thematically that sort of go deeper in there. But maybe just to level set and follow up there as we were talking before we started, I think one of the most dominant themes of the conference is sort of the broader macroeconomic environment. So from your perspective, you're obviously consumer-facing. You talk a lot about commerce. Talk a little bit about what you're seeing in these as a broader macro environment? Or how you think about operating a business in a macro environment that both up and down has been as volatile as this one has been over the last couple of years?

Yes. That's one of those -- this is as we were discussing, this is one of those -- anybody -- everybody has their different interpretation. So I will talk about what we have seen. One of the things we have seen early in this particular period was that both customers and merchants. I will go into merchant side. First of all, merchants, merchant partners for us, they were seeing is that they can raise the prices and they raise the prices, which means consumers are ready to pay more prices, but sometimes the sales goals, even if they fall short of that, they're fine because they don't have the full capacity themselves because of the liver problems. And I think that's one of those things, which is, okay, merchant, I'm okay with not operating at full capacity, but I can raise the prices. So discount is not top of my mind to drive the incremental sales. And on the consumer side, I gave this example earlier towards consumers have expectation from Groupon that it is going to be a deal, it is going to be a best price. And so when they come in and they are saying, oh, this deal is not that great at a discount. They had a hesitation to pull the trigger with us. And so both sides of our marketplace were getting squeezed at the beginning of this particular period. What we are working on is to make sure that, one, whenever a consumer comes in and there is a little less discount, but make sure that they have -- their experience is great because if there is a deal, that doesn't mean you should have a substandard experience and reemphasizing that, so making sure that we have quality merchants and with merchants, making sure that we are very [indiscernible] on how we can be better partners for yields, that has been our forte.

Okay. Understood. On the last earnings call, you talked about deploying more investments into marketing with an aim towards traffic engagement. Are there any updates to give as you see the trends to deploying out in either August or September against pushing it in some of those investments against the backdrop you see?

Yes. Damien, you want to take that?

Yes. And Eric, as you referenced kind of the overall macro landscape, it's kind of choppy at the moment, inflation how consumer behavior is playing out. But the Groupon local billings performance throughout Q3 has been relatively stable. And yesterday, we posted to our IR website the August results. And what you're going to see there is real consistency and performance over the last 3 months. So our business is exhibiting a fair amount of stability despite kind of this macro landscape. As far as marketing and a number of the other marketplace enhancements, I'm sure we'll talk about later in the webcast here, we're in the very early innings of that. And there's really intended to be downstream value repeat engagement from our customers. So we expect that, that will stack and build in the cohorts over time. So we're excited about the progress that we're making and look for continued progress with consumer and merchant outcomes in the back half of 2022.

Okay. Great. And following up on Damien's answer, maybe mining some of those strategic initiatives and starting first with continuing to build on sort of the broader turnaround efforts on the platform. One that you talked about marketing in the last call, but you also talked about improving inventory density. And you called out sort of the dining and restaurant vertical, in particular, is an area where you wanted to lean in and build a lot of density. Maybe a 2-parter for me. Number one, talk a little bit about your broader strategic initiatives around improving density of inventory on platform. And second, maybe use that vertical as an example of one that you seem strategically focused on and how investors should think about that vertical inventory density improving and leading to performance?

Yes. So I think the great example of that one would be actually, if you have the Groupon app, you can see that in San Francisco here. If you would have opened our app about 2 months ago, you would have seen very thin dining inventory. Dining, a food category in general is one of those high frequency. It doesn't have a large margin associated with it, particularly high frequent customer keeps engaged. They use that. They are like, oh, this is really great because I'm using that once a week at least. And so we didn't have a lot of dining inventory in this particular area. Now if you open our app, you will see at least 30 to 40 places. If you just look for sushi, you will find 10, you will find a bunch of other food types. Essentially stepping back, inventory density is about meeting the customer expectations. And what we earlier gathered was that we were far stretched too thin into a lot of geographies, and we were trying to chase down. And that's why I gave the example of, hey, we were trying to chase down a beauty merchant in various different geographies versus trying to think about unlocking the effect in a specific geography. So that's what we are doing in Atlanta now we are very focused on making sure that our inventory selection is what customer wants. And there are 2 aspects to that, which makes us unique to understand those aspects. One is about whenever a customer is looking for, let's suppose you are looking for take dining or take haircut or take oil change, whatever you're looking for, we know what is your traveling propensity. Because if you're in San Francisco, you are not going to go to Palo Alto to get haircut. But if you are, for example, in Atlanta, you might be able to travel 10 miles. It's not that big of a deal for you. And so this traveling propensity and stitching the supply around customers is something we can uniquely position to do because you understand where the customers are and where our inventory is. And that is a very important angle in local. And so we are trying to make sure that whatever we offer to our customers, it comes with that particular density from a customer standpoint. It's not what we imagine that we need to have x. And so that's the focus for us to make sure that meet customer expectations and fear that with making sure that the quality service providers, which is given are there at the best price.

Maybe just following up on that. When you think about commoditized versus differentiated inventory, how do you think about the investments you need to make -- to make sure the sort of unique differentiated inventory on the platform versus booking something that people can book almost anywhere? How do you think about aligning investments against the differentiation theme?

Yes. That's one of those themes that if you think about it, like what are we trying to do is we are not only trying to save money for our customers, we are trying to make sure that we solve their everyday problems. And customer everyday problem starts with I have a date night. I have a kids that I need to take care of in the Sunday afternoon. I don't know what events I need to do or what things. And then, if we plug our inventory to solve this particular customer problems in such a way that has actually become seamless for customers, that's the convenience angle. That is the one which we only can create because we are the local marketplace that is transactable. And that gives us that advantage to say, oh, we can solve this particular package inventory problems for our customers through package inventory, the problems that customers face in everyday life. And that's where the unique and differentiated inventory strategy is about to solve the customer problems. We have launched some of those initiatives, 1 in London, 1 in Chicago, and it's early years for us.

Maybe one follow-up just as I think allowed. When you think about realigning the platform around differentiated inventory, inventory density, a push into categories in a much deeper way, how should we be thinking about realigning the sales force and the organization to aim up against those goals? How much of this is internally pointing the organization towards the goal versus external execution per se?

I think it's both. I think at the core of it, we want to make sure that our organization internally is aligned on understanding what are the pain points you are trying to solve for customers. So when we talk about inventory density, when we talk about a specific city, we understand that, okay, these are the locations that we need to have. If you don't have the customer expectation to meet their oil change need or whatever the other, what we call 50 services needs, which are top of the mind for our customers, then having that particular need met in some other geography is not going to matter. So aligning [indiscernible] are internally towards that. And creating the packages, the way we see it is actually it's a combination of we internally doing it. As well as customers also enable to create these particular packages. And so that's the step of the journey.

Got it. Okay. We talked about inventory in a couple of different ways, but I wanted to attack another vertical you've called out, clearly, you're trying to differentiate as we've spoken about in the beauty and wellness category. So for those who are less familiar with the initiative, why don't you share with us a little bit about what you're trying to build about Beauty & Wellness? How should we think about the road map of building it and investing behind it versus when we'll be able to see an inflection or output or yield from those investments in terms of the financials?

So I will defer the financial question to Damien, but I will tell you the genesis of what we are trying to do here. I think the core question in the local always when you think about the health and beauty category. There are things that you use on an everyday basis or at least once a month or multiple frequent basis. Those are the ones which we are doing good at Groupon platform. But then there are things where customer quest start from first trust. They want to understand there are so many providers, why should I go to this particular x provider versus y provider? And the -- on the surface, the test description doesn't actually do a good job, reviews don't do a good job to tell you to how can I establish the trust with these particular providers. What we are trying to make sure is that when the first condition to select a provider is trust, then how can you solve that particular customer problem. And that's what we are trying to do with this health and beauty app. We are trying to start with how can we get the selection -- premium selection of providers on the platform, make sure that we solve the customer trust problem for them first. And then provide them the pricing options and whatnot, which we have been doing so. But that particular concept at the core of it starts with trust first and prices second. And that selection, we are very focused on.

Okay. And I think we were going to talk about the revenue benefit or how to think about the flow-through from the initiative, yes.

Yes. And maybe even dovetailing with your prior question, step back on the Groupon until the things that we have that are tremendous assets is a large customer base. Yes, we can -- which we can do more with and we have a large installed merchant base as well. And so whether you think about it as plugging inventory gaps or becoming more multidimensional in our beauty and wellness space. These are merchants who we are already working with in some way, and these are customers that are already utilizing Groupon for high discount vouchers. As we become more multidimensional, we have those 2 assets to kind of move into these adjacent spaces and become more moderate in a marketplace feature. So it really isn't about kind of investment into white space per se. I would think about it more as natural outcropping of some of our current business model.

Okay. That's interesting. And then maybe coming back to this theme, though, because it's kind of interesting. I love your perspective on the cross currents in the business because you're trying to bring costs down. But at the same time, you're trying to push certain levels of investment into the business or can change the consumer experience, grow density on the merchant side and specificity on the merchant side. How do you strike the right balance between operating efficiencies and trying to drive towards some of those goals versus repositioning and investments for long-term growth?

Yes, it's a fair question. And you saw on our last earnings call, we announced our large $150 million cost reduction plan. But the game plan for that cost takeout was really built on the shoulders of increased automation, efficiency and a more modern marketplace experience for both consumers and merchants. Let me give you 2 examples there. On the merchant side, we're leaning into self-service. And that's why that's a expectation that merchants have for tools to run their business, they should have some degree of self-service. And the proof point here for us, and I'll give you this data point is in the fourth quarter of 2019, we were -- our mix of deal launches via self-service to less than 20%. Whereas today, year-to-date through 2022, that's over 75%. So the proof is here in the merchant adoption of that tool and utility. On the consumer side, I'd point to kind of the investments that we're making in cloud infrastructure, in our tech stack. As we've been along on the journey to migrate to the cloud, we intend to be complete by the end of this year, but that's really about becoming more modern from a technical architecture standpoint. We've been able to take costs out, retire and decommission a number of services. And now any product feature that we're going to be able to do is going to be built on this more agile, more nimble more best-in-class, more modern type architecture. So we look at the cost-out actions that we're taking as huge steps in the right direction of automation and efficiency in a more modern marketplace. So we see it as enhancements to kind of the Groupon platform.

Okay. We've talked a lot about the merchant side, and you've sort of alluded a little bit to how the consumer experience might continue to change. Talk a little bit more about what you're sort of solving for on the customer experience side. If we open the app in 12, 24 months, how much different will Groupon look forward-facing to the consumer? Or what you're solving for in terms of what that customer experience looks like interactivity, utility, things you're sort of solving for on the customer side?

Yes. So I think that's a very good question. That's why I asked some of you to check out the Groupon app 2 months ago versus today in San Francisco, you will see a huge difference. But what 12 months from now, when you will open as a customer of Groupon app, what you will see is that there is a selection that is applicable to you on everyday services. You're not going to find some particular deal that you are never going to use of. You will find it much more tailored towards the services that you are going to use in everyday life. That's one. We are going to try to make sure that those particular deals that you have seen are very, very catered towards from a quality standpoint, description standpoint. And then those particular deals, you will find it very presented in a great manner that you are like, oh, this -- I didn't know this provider has this particular services that I can go and take advantage of, or I didn't know that this particular establishment exists, but in the area that you want to explore. And I think it starts by going towards that inventory density. And so if you bring it back to the numbers, for example, the thing which I talked about back again, when I joined, one of the things I discovered that customers are using our marketplace, making 2 purchases or 3 purchases a year. Like when you are a horizontal marketplace that has everything in your local neighborhood and you are making only 2 or 3 purchases a year, that has to change. And that can change by having this particular grid inventory set, that is at the right price, that is a decreased services. And that's what we are focused on to make sure that we become a utility for you on an everyday if not at least every month basis in your local labor.

Okay. Understood. And one question we do get a bit from investors, and it's probably early to answer it, based on what you see in Atlanta, how should investors be thinking about rolling out the test from Atlanta on a wider basis going out over the next couple of years? Is there any sense you can give what the cadence of that might look like? Or is it still very data dependent at this point?

It's still early. We are trying to make sure the one -- there are a few criteria we are trying to make sure that what we do in Atlanta is one, it is something, whatever we are doing is scalable. We are not trying to do something which is, hey, this can be only done in Atlanta, but I can't replicate that in 20 other cities if I want to go, and I should be able to turn that on in all 20 cities. So as Damien talked about, we have self-service model to onboard the merchants. We have the right set of tools. It's not a manual process that it will take me a few years to get to other cities. That's one. The second part we are changing is we are trying to put the customer experience better. So going back, if you achieve the inventory density, another part of this particular achieving inventory density is a lot of companies have this particular, what I call, catalog-based algorithms, which are looking at customers who did the haircut, also did this particular thing. But they don't consider that the customer profile, our customer persona. In that particular case, we should recommend it differently. It's not one catalog fits all. Horizontal marketplaces like us actually have bigger problem in that particular category because we don't know. But the beauty of our platform is that our customer experience, we get 60% recognition on our customers. And that means I can tell you that Eric came in, and I can tailor the experience much better for you. So we are also making the changes on our customer experience there. Combination of those 2 things would actually make Atlanta much better experience for a customer and that we can scale to all other cities.

Okay. Understood. Damien, bringing you into the conversation. I think one of the big talking points out of the last set of results was you guys framing up sort of an adjusted EBITDA margin target of 15% to 20% as you look out to next year. Maybe walk us through how we should be thinking about the levers and the building blocks between where the company is now and what builds into that forecast over the next 18 months?

Yes, I appreciate the question, Eric. And I think additionally, to those adjusted EBITDA margins, we came out with free cash flow targets, and I think they're very attractive from a poor marketplace as well as our investment. And really 4 factors kind of giving me confidence with respect to 2023 numbers and where we're heading as a company. Number one, as I talked about earlier, our local business is exhibiting a degree of stability. Number two, those cost-out actions that we're taking that are going to provide an enhanced experience. Those cost savings, we're on track to deliver them. And many of -- most of them, majority will show up in the 2023 P&L and cash flow. Number three, a number of the enhancements that we're making to our marketplace to improve engagement, frequency and retention of customers. Kedar highlighted a few of them today, ingestion of a large amount of food and drink supply personalization of our marketplace. Kedar mentioned kind of the low purchase frequency that we have as a marketplace. We shared a figure where if we're able to get back to pre-pandemic levels of purchase frequency on the Groupon platform, that represents a $250 million revenue opportunity for us. And then -- I mean it's basically most of -- also with that, these enhancements, number 4, are going to be showing up as improved local performance in the second half of 2023. And what that will mean for us is any marketplace is going to be generating cash flow and net working capital for us. So we look for these 4 factors to be kind of showing up in our 2023 business profile and financial outcomes.

Got it. Okay. Understood. Within all of that, and we've talked a little bit so far today about driving more traffic, more engagement, driving higher levels of utility happy to have either or both of your perspectives on this, but you've talked about leaning into marketing investments and yet we've got these margin targets as we look out to next year. How do you think about marketing as a mechanism to emphasize your growth initiatives versus striking the right balance against your margin initiatives over the next sort of 18 months?

So I will talk about my marketing philosophy, in general and then Damien can add the light around the margin targets and how that aligns with that. And so the marketing philosophy I have is very simple, which is basically, you should put the fuel on the fire when there is a fire to begin with. . And one of the things we started at the beginning of the year was we had a very high refund rate. We have customers where we didn't have in some particular cases, great confidence because the refund rate is a reflection on some particular cases towards the price, and in some cases, poor service quality and whatnot. We fixed those particular problems. And we now have a better mechanism to say we can systematically keep these particular rates under the benchmark that we expected it to. It needs to be a great customer experience. And so we brought down the marketing at the beginning of the year. We brought down marketing, performance marketing across the board because we were seeing this particular core product having some problems with the customer. So why get it to more customers, in that particular case. Now we are going back and we are enhancing our marketing because now we believe in what the product we are offering is great for our customers. So I believe in marketing philosophy or letting people know and distribution of performance marketing when you have great product that shows great organic traction. And I believe that we have a great organic traction with our existing product.

Okay. Super clear on the philosophy side. Maybe, Damien, just the balance of sort of marketing investments against margin expansion. How should we think about striking that balance inside the building blocks you just talked about in your prior answer on the margins?

Yes. The Groupon story needs to be one about driving purchase frequency on our customers and getting more utility out of our platform. So that means that we can grow without taking on a lot more customers. You get a lot of questions about it, or you going to -- do you have to get back to your prior customer base in order for this marketplace to be attractive? And the answer is no. We're able to drive purchase frequency. Now a lot of that purchase frequency should be coming from organic means and levers. Kedar talked about some of the inventory enhancements that we're going to do or he talked about some of the enhancements to the consumer UX that should be driving increased utility on our platform. Ultimately, as that pertains to marketing investments, what are we doing where by improving purchase frequency, improving retention of customer, we're going to be enhancing -- increasing the lifetime value of the customers on our platform. That's going to give us the ability to invest in marketing against that. But we see it as a balance between growth, growth and investment there.

Okay. I do want to give an opportunity if anyone has any questions in the audience. I've got some questions to keep going in the last few minutes we have. But if anyone has any questions, have it entertained. Okay. I'll keep going. One other topic that sort of maybe just quickly wanted to talk about is, I don't think there's enough attention given to sort of the international business. How do you think about your international portfolio? How should investors think about the U.S. portfolio versus the international portfolio with that Groupon?

Actually, when I joined Groupon, one of the three things I said -- called out is that this company has a great set of customers scale to not scale only locally but also internationally. And I will go back to that particular point around our international business. Our international business is fragmented. So on the country side, you can see countries and say, oh, this particular x country is different from y country and whatnot. But at the core of it, these are also extension of cities. And so if you think about it, my experience in Barcelona needs to be very, very similar to my experience in Atlanta, which is, again, derived around local. But one of the things -- interesting things we are doing internationally is also we are trying to make sure that we have curated supply to begin with. And that's something we have started to take more initiatives on making sure that our presentation to this particular supply is different to the -- cater towards local audiences and how those particular local audiences actually see that particular supply or what they value is a little bit different than North America. But aside from that, the core strategy, which is focus to make sure that we have the right inventory at the right prices, at right quality is very applicable to international as well. The only thing we are trying to make sure is that the local specification on presentation angles, we incorporate that and make it much more curate for our international experience users.

And a great example of taking not just kind of consumer-facing but merchant-facing tools and utility from U.S. to international, it's going to be on the self-service side when I kind of say that the stats that I gave on the merchant adoption were really just North America stats. And so again, we can use a merchant self-service tool internationally to acquire supply. But also, we're able to surface far more data and insights to merchants through these type of utilities. So that's a way of that we're kind of leveraging the scale and scope and learnings of Groupon U.S. and applying them to our international markets as well.

Staying with you, Damien. I want to ask, obviously, there's the cash on the balance sheet, there's sort of equity stakes, you have like some up. How should investors be thinking about against your broader goals for operational efficiencies, growth investments, turnaround, but then utilizing the asset side of the balance sheet in a way that can create equity value for shareholders? What's the latest update there on capital allocation and sort of driving value off the asset side of the balance sheet?

Sure. And as you said there, we want to be leveraging our balance sheet in a way that creates the most value for the company and for our shareholders. And we're going to be thinking about those investments and balancing what makes sense from an ROI standpoint. As you mentioned, with sum up, we do have a 2.29% ownership stake and sum up that's carried on our balance sheet. It's a noncore asset for us. It's a passive investment. And so we would certainly be looking to monetize that if and when it makes sense to do so and deploying that capital to either we fuel our turnaround story or return capital to shareholders.

Okay. Understood. Maybe just in the last few minutes we have here, Kedar, I've been asking everyone putting them on the hot seat at the end of our conversations this week. Whether with respect to Groupon itself, the organization, you run or the broader industries you operate in, local commerce, e-commerce, 2-sided platforms, any outside-the-box thoughts, predictions, things you don't think investors are sort of appreciating or understanding about what may play out over the next 1 to 3 years?

I'm going to keep your comment earlier in mind that everybody is now has a PhD in economics. I don't.

I don't either.

And so take it with a grain of salt. But I think the core question in this particular economy, which is going to play out is that there are -- one size fits all is a very difficult prediction. And so as we all know, there are certain segments of consumers, which are very, very vulnerable to prices, some certain set of consumers which are not. I think when I look at it from a Groupon perspective, because that is most important for me to look at it, is how we serve our customers. And there are customers with, for example, our travel profile customers, they are spending and they are really engaged. And we continue to make sure that we continue to serve that particular profile and segment with their larger selection. And they are making -- we just got to make sure that they are getting what they prioritize, which is quality of the offer. And then we have the consumers who are -- have everyday life choices, and they are just trying to make sure that I get that at the best price possible. And we are serving those. And so our platform is actually, we are very focused on making sure that we serve all year around all types of customers as opposed to serving only one set of customers that can get affected with 1 microeconomic headwind. And so that's why building the marketplace, that is built, first and foremost, on local, transactable, but with that particular price confidence is my focus. Whatever happens in the economy, I'm also trying to make sure that we don't get effective with it.

Understood. Well, Kedar, Damien, thanks so much for taking the time. Really enjoyed the conversation. Please join me in thanking Groupon for being part of this year's conference.

Thank you.

Thank you.

Thanks.