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

All right. I think we're going to go ahead and get started. All right. So I'm Stephen Ju, the Credit Suisse Internet Equity Research team, joined here on the stance by Kedar Deshpande, who is the CEO of Groupon; and Damien Schmitz, CFO. So welcome, guys. Thank you for joining us.

Glad to be here. .

All right. Awesome. So before we get started, I have to point out that there is a safe harbor statement that you should all look at. It's on the Groupon Investor Relations site.

So with that out of the way, let's get started. So Kedar, it's been almost a year since you were appointed the CEO. So -- but Groupon has been around for a long time before that. So can you explain I guess, the key pillars of your turnaround strategy since you joined? And why is now an interesting time in the company's life cycle?

First of all, thanks for having us here. It's great. The great conference. Regarding -- since I joined, first of all, why I joined Groupon because you don't find any other company like us, which has a scale of 20 million-plus customers operates internationally. And it has a tremendous potential in terms of local because we touch so many different businesses. so you can do so many things on Groupon. When we -- when I joined the -- actually, the economic cycle turned into the worst it can happen for Groupon. So as merchants started to have the capacity issues, they raise the prices, discount becomes secondary importance. And the year where we started to see a lot of gaps because then you understand, okay, what are the challenges inside the business when your business is going down more. And one of the things we noticed was that, for example, merchant refund rate was escalating. And we put in the place to make sure that the 2-sided marketplace that we have, we actually have the right parameters right mechanisms to make sure that customer experience is intact. And so we put in the better refund policies we put in all the customer service response times, much better SLAs and things like that. And so fundamentally fixing this particular platform from a customer experience perspective was very, very important for us. And now we are walking into the reason the exciting time at least when I think about it, like can't wait for next year to happen or going into even fourth quarter right now. We are looking at it as like our strategy is more anchored around the challenge we have faced in Groupon history, which is customers come in and they buy on deal and they don't come back for a while because they came for that specific deal, and we couldn't get that particular customer to come back again and again. And now we are looking at lots of initiatives to make sure that the customer actually can come back again and take advantage of our platform in a much, much better way than they have in the past. And so we have lots of initiatives regarding that. We can go into the discussion in the subsequent discussion, but that's why it is exciting time to go and invest...

You are the one executive at this technology conference, who are saying that you really can't wait to get to next year given the math, right? So with that in mind, I mean, everybody standing around at the conference, everybody is worrying about the macro backdrop. So key question is what does the world look like for everybody last year. So if you can address what you're seeing so far in terms of the strength of the consumer demand as well as, to your point, your ability to onboard merchant supply, I guess, if there's less demand on the part of the consumer if they're being a little bit more choosy then they're going to be willing to put more inventory on Groupon, I suppose you can address that? And are you seeing any sort of regional differences in terms of the macro headwinds?

Yes. So first of all, like we -- what we learned from this year, right? Like so when we were actually looking at it, our platform was really great -- has great appeal in terms of when you have a discount and you want to drive more demand to the platform, which is what probably will happen. But even if it doesn't happen, one of the things we developed this year was how to sell full price inventory. So some of our merchant partners, they didn't want to take the pricing down. And so we have to go and figure it out to say how can we keep their pricing policies intact but still give value to our customers. Some of the initiatives that we have done this year, whether it's a specific cash back to customers, whether it's actually Groupon Box for specific deals instead of taking the price lower and being able to sell more of that, I believe that we can actually grow in a variety of economic cycles. And the one you just talked about, which is 2023, probably people are thinking like, oh, demand is going to slow down. They are going to look for the discounts. And that's why I believe that we are really well suited for that.

Yes. So are you saying that your business is countercyclical? Yes. I mean -- and are there any verticals in particular that you're seeing evidence of, I guess, that countercyclicality. Yes.

I think our business is so varied, right? Like so what we see in the HBW, for example, Health belt and beauty versus what we see in things to do, there are very different things. And so one size fits all is not the case of our business. At the core of it, though, it's a local business, and we are trying to make sure that we have both the discount and nondiscount model working for local businesses. .

Yes. So I think you touched on a point earlier that was interesting, I think, traditionally, I think, looking to onboard merchants and having the offer discounts for the lead now you're getting them -- you're enabling them to sell things at full price, right? So I guess, has that been a material helper in that regard? Because I think you've always looked to sort of aggregate the supply in any given local market. So freeing them from the need to mark their stuff down, right? So in which case, then if price is not the driver, right, then what is going to be the attraction to the consumer right? Because there's a specific sort of like thing that consumers understand about Groupon, right?

Right. And -- so customer value proposition for our platform always been price first. It's a deal first. And I talked about like how we are generating the confidence with customers to make sure that they feel that this is a deal that I can trust. And so we build a mechanism for that to make sure that whatever they buy, it actually is going to have that particular confidence. But at the same time, there are -- if you think about our platform supply strategy, we are changing that particular supply strategy. And so earlier, our supply strategy was like, let's get as many offers on our platform as possible. But now we are very, very conscious of what offers we want to bring on platform. Does that particular offer, can we bring it from a long-tail perspective? So do we need to have deep discounted deals? Actually, Stephen, let me step back and give you the example Groupon always, we just went through Black Friday, Cyber Monday, not every retailer went. Imagine you are a retailer. You did Cyber Monday, you had crazy deals on Cyber Monday, traffic walked in. They only bought your crazy Cyber Monday deal. They didn't buy anything else.

They don't stick around. Yes.

That's not going to work, right? And so every retailer always tries to make sure that you attract some deals, hero deals, and then you sell other things. What we did in the past is that we actually always try to create these hero deals all the time. And that's not good for merchants, and that's not good for consumers. And so what we are changing is to say, how can we have some hero deals, which we are putting the sales force on. But everybody else will have some discount but not hero deal discount. And that is good for merchant partners, and that is good for consumers because now they can utilize something which they really use in everyday life instead of trying to find another hero deal because that was the expectation we set with them. .

Okay. So there is, of course, the Doorbuster deal, right? But then in order for you to say, okay, like this other full price item here, this is also pretty good. So it requires knowledge of the consumers, I guess, prior buying behavior or access to better data. So what have you done to, I guess, to be able to better merchandise to the consumer?

Yes. So there are 3 things we are trying to do. I will start in the reverse order first. Let's talk about data. We have lots of data. But unfortunately, we were recommending to the customers which was like what is the highest gross margin yield was for us. And what we change now is to say, there are different aspects of the recommendation. How can we be more consumer oriented? How can we be more to more customer oriented. And we are now starting to propagate the deals which are more applicable to you. We have changed our recommendation algorithms in a few countries in Europe, and we actually saw a much better lift in revenue per customers. And the reason for that is because we started from fresh on these particular algorithms instead of trying to bombard ourselves with lots of legacy rules and things like that. And so we are trying to roll that out. The second aspect of that is giving consumers because even if we cannot generate a recommendation, if I give you some incentive, which is what we try to do with customers, here are the Groupon Box. You can use it on any deal. Now customers are going and trying to find out what can I use it on, on an everyday basis. Not only that is increasing our purchase conversion, but also secondary purchase rates because now consumers are trying to find out, "Oh, this is -- I didn't know Groupon has this. And the third thing is some consumers are even more applicable towards like let's suppose you are buying our dining offer, we gave you an incentive to buy a massage because you didn't know that Groupon sales massages, now consumers got specific credit on massages. And that is also performing well for us. So all these initiatives are to drive customer awareness and actually experience towards the variety that we offer in local as opposed to central to you bought those one deal, you came back and you are looking for another hero deal and you never come back.

Yes. sounds kind of like your prior company that I used to work with.

Yes. Thank you. Some of the Zappos license, the only -- so I tell people that when I was at Zappos, by biggest challenge, customers buying -- some customers buy shoes crazy, but some customers will buy them only on when they require once or twice a year. What we sell is actually very different you can buy all changes to things to do. And that's why our purchase equation should be larger.

Yes. So right, so the customers come back, they're stickier. They're exploring other categories. That sounds like a recipe for your lifetime value to start heading higher, right?

Exactly. At the core of it from just a perspective, we have 2.5 or 2.7 purchases per customer per year. That's very low in my opinion. And I think we can actually get a customer to buy at least once a month from us because we have the local things that you want to do in your neighborhood. So we want to be your go-to local destination for all the services you need. And I believe that the supply, one, we are acquiring the long tail of supply and head of supply and long tail, much more scalably without using the human capital and then head supply with our relationships. And once you have the supply, the customers will try to understand that based on either the incentives or our recommendation and that's how the full model will look.

Okay. And I think you mentioned that you rolled out some of these, I guess, for lack of a better word, the merchandising initiatives in a handful of European countries, right? So I guess, have you observed some of the early benefits to hopefully more rapid fire purchasing? Or what are the metrics that we should be thinking about in terms of what you will be reporting in the future in terms of success not success in terms of that endeavor?

So from a supply standpoint, the metrics we are looking at is actually what are the number of merchant offers. So we are looking at supply in 2 different ways, okay? We are looking at long-tail supply, that what are the things that we -- what do we call as PDLs? What are those things? Do we need to have oil change on our platform? Do we need to have a massage on our platform? And what is the quality of supply we need to have. And so that's what we call supply density. And we are working towards that to make sure that we have the right supply density. . And then second, which one we need to have in the head versus which we needed to have in tail. And so one of the constraints on Groupon, interestingly, when I came on, where we started to show the -- see the green shoots, but we never scale that yet, was around the self-service models. So earlier, if you're a merchant, you have to talk to a salesperson, and our salesperson will call you and then we will talk 10 times and then your deal will be up. And then there is a glitch in the deal and then you again talk 10 times, and then we'll fix it. Now everything is self-service on these particular merchants. So for example, 75% of our new launch deals in Q3 were self-service. Merchant came in, launched that long tail deal by themselves, really very well. And so for us, one of the KPIs is what is the long tail, what is the head supply? And how much of that coverage we want to have in the market. And so we are specifically looking at what is the coverage in this particular supply density? And how much coverage we are going to need to create to unlock the city potential. That's why we are working in Atlanta to make sure that we have the repeat purchase frequency and that will only happen, repeat purchase frequency is output the supplies, the input supply will only happen once we have enough density in the market.

Okay. So not as much of a reliance on salespeople as before. So how are you finding them the long-tail supply?

Actually, we have both advantages. One, there are lots of merchants who want to work with Groupon. They are coming naturally to sign up for us with us. And then we also have a targeted list of supply merchants that we go after digitally. So whether that's a digital advertisement to these customer merchant partners? Or they're actually sending the mail to these merchant partners and things like that. All these are self-service driven, and so they don't need to talk to anybody, but we are getting lots of interest on that.

Got it. Now...

Sorry, one more thing to add here. The biggest thing with our platform, it's a paper use platform. So when you sign up you don't how to pay anything for us.

It's not from cost as pay as you go.

And so as long as merchant is making the money on merchant economics are vital for our long-term duration. And it's not a hero deal that's coming at the expense of long-tail merchants. Merchants are fine to be on our platform.

Okay. Got it. Now let's put the spotlight on you, Damien because I think, you -- I think you previously outlined targets for 2023 adjusted EBITDA margins of about 15% to 20% and free cash flow of $100 million on a 60% full year local billings recovery, right? So can you speak to the sensitivities of these targets? And in other words, what range of volume revenue recovery could we expect to see the EBITDA and free cash flow targets within the outline range? And how robust are the levers that you have in place to protect the profits?

Yes, you got it. And it really -- I mean, I think it's a pretty attractive financial profile for next year for Groupon business. Now there's 2023 numbers really predicated on 2 main factors. First, we've taken significant costs out of the business. We've begun executing on that, and we're very well on track, and the transitions in a way that's really business enabling not just a pure cost reduction, tar touched on self-service, automating those workflows, streamlining and simplifying our technology stack and platform through our move to the cloud. And the second factor is, as you spoke about, achieving 60% local billings recovery. That's an acceleration from where we're at today. I would tell you, too, we do expect a few points from price. We do expect a few points from refunds improvements based upon the actions that we've taken. And Kedar touched on a number of the organic or growth driving activities that we're starting to see some green shoots in. And when you think about our cash flow profile, once we get the top line going, and we should see much better down to the adjusted EBITDA margins, translating over to the free cash flow statement. With our marketplace model as with other marketplace models, you get that top line moving. And that we've seen stability now. But once we get that kind of acceleration, we're going to see some net working capital gains there, too.

Yes. Got you. And I think, Kedar, you talked about, I think, $150 million or thereabouts for cost savings by the end of 2023. Tech costs primarily, North American sales force and process improvements. So can you walk us through from a practical perspective, like what it is that you're actually doing and how you get there? And you also outlined an additional $50 million of cost savings to be identified throughout next year as well, right? So at this stage, like where do you intend to find these savings?

Yes. So first of all, let's take a look at what we did, okay? The sales model we had in the past was around, you need to support, call a human being. Well, we have 200, 300 merchants assigned to a single human being that was not sustainable. Automating that and removing the human in the loop in this particular case was much better both from merchant experience perspective as well as for Groupon in general. And then self-service is driving a lot more, as I said, adoption. So that's one. We took out a lot of costs there. And now we can focus on the head accounts rather than focusing on the tail while creating the supply density. The second is around tech. The tech platform was formed as with any growth company that is going on at a very rapid pace. We created this particular model of like 600, 700 micro services, and we said, "Oh, this is a great platform and whatnot". But when you are trying to actually cut the cost, you look at it and say, are these particular services required or not? Is this everything that we need to pay. And that's the problem lot of organization growing to, including ours, is that the tech debt is invisible. And so we actually -- as we are moving to the cloud, we started to remove a lot of more cost and we took the actions and say, okay, we are not going to do this. We don't need to make this particular thing, which has been sustaining. To give you a simple example, we never force upgraded users to our app until recently, like that was crazy that we have maintained last 6, 7 years of whatever legacy and nobody actually force upgraded. And so we are maintaining for 0.1 consumer. And so it's along those lines. Where we are going to go and where in identify $50 million, I think there are some biggest opportunities again in the tech. So as we complete our cloud migration, one of the things we want to talk about here is our cloud cost is actually much expensive per transaction than some of our other peers in the industry, marketplace wise. So we have a humongous scope there to cut the cost. And then we have other things that we can reduce. So anything that doesn't add the value to the customer experience, our partner experience, merchant partner experience, we are going to take a look at that.

Okay. Got it. Now -- but we are still talking about driving 60% full year local billings growth recovery next year. So do you think your cost base is rightsized to address the opportunity that you want to go after ahead? And in terms of the automation and process movements you just talked about, what are the other sort of long-term benefits that you intend to unlock there?

Yes. So the cost basis reduction, as Damien pointed out, we are not doing it to just say, hell, this is more cost in the business, let's take it out. We are doing it to enable the business. And so what I'm more excited about is not just taking the cost out, but how does that benefit customers by having more supply on the platform on the long tail, now you are just not buying that Hero deal. You came in and you bought a hero deal and you went away. Now you have things that you can utilize on the platform. And so what that will drive is more purchase frequency. What that will drive is more automation and merchant partners can control that. And so we don't need to add back that particular cost as we scale up. Operational leverage will be created because the fixed cost is much lower, even variable cost is lower per transaction. And so I think that's why we are excited about getting to that 15% to 20% EBITDA margin profile.

Got it. Now switching gears a little bit. I think you hosted your second annual Groupon Day this year, right? So I think that had some large savings and special deals. So any key metrics to share in terms of how the consumers are responding to the event?

Yes. So the thought process stepping back on the Groupon Day was, hey, before holiday season, we want customers to be aware keeping group on top of the mine. And from that particular standpoint, we got a lot better customers signed up for my e-mails, there are a lot more customers who signed up for SMS, which is available now as a new offering and has much better response rate and whatnot. And we got traffic increase from a sales perspective, actual now perspective, what we call billings, it was moderate growth. It was not up to our expectation. But we believe that this particular input where we got a lot of customers to sign up and being aware of the Groupon again actually is driving the tail towards how we are performing in November.

Yes. Now in terms of consumer awareness and kind of dovetailing that into marketing, I think you previously mentioned that you've reallocated some of the ad budgets toward mid-funnel marketing in the fourth quarter. So which channels in particular are you testing? And what's the rationale here in terms of moving up funnel a little bit? And how are you measuring this performance? Because immediately, if you start going a little bit more mid-funnel or top of funnel, it's a little bit more difficult to measure. So I'm just wondering if you can comment about that.

Yes. The best part of our business on the measurement side is actually you can have control and test geographies but it also depends on the supply. And so we have to be very careful because in e-commerce, you can say the phone cover in Dallas and Seattle, and say, "I'm going to performance marketing test here and not here. But that same cover remains versus in our business, what difference is, is that inventory in Dallas is different from inventory in Seattle. And so we want to, at the core of it, stepping back. We always did performance marketing very well, but sometimes you're shooting fish in the bar, and that's not a great performance marketing. So we are always experimenting to make sure that we have the mid-funnel marketing or laying to enhance performance marketing ability. And now that's what we are going to do. We are doing that in the fourth quarter. We are trying to figure out that right balance. But again, taking a big step back, 20 million customers on the platform, it's a large number of customers. I think my key is starts with supply. If you get the right supply, customers will come more often on your platform. If you set the expectation to the right consumers that you can not always have the Hero deal, but you have the discount that you can use on everyday basis that will unlock us. So we are focused on marketing optimization, but more focused on driving the repeat purchases, not one and done only.

Got you. Now we have a few minutes left here. So let's step in a time machine here, and we're now in December, late November, early December of 2023, this is the year that you couldn't wait to get to, right? So as we're sitting up here on stage, once again, what do you think we'll be talking about in terms of what you're able to accomplish in the trailing 12 months.

Yes. First of all, we will be talking about how great this conference was.

Awesome. It's always great.

Going back, I think what we will be talking about, which is what we are talking about here. I believe that we will be actually showing the green chutes in proven in some particular cities where we have created the supply density and now consumers are coming and interacting or transacting with us on a much frequent basis. Our merchant partner satisfaction is much higher for us because they can now don't have to create the hero deals, they are actually creating smaller discount deals, but consumers are responding very well to those ones. I think those are the key to steps to unlock our business. And we are putting all these things along with the reduced and efficient cost structure will get us towards that particular profile that we are trying to do.

Got you. All right. So with that, I think we'll wrap it up. Kedar, Damien, thanks for joining us here.

Thanks, Stephen.

Thank you.

Best for lock in the coming year.

Thank you.

All right. Awesome.