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

Okay. Great. Good morning, everyone. My name is Trevor Young. I'm one of the Internet analysts here at Barclays. I'm pleased to be hosting the management team from Groupon. Just quick notice that Groupon has various safe harbor statements out there, just check their SEC filings for more details on that. I won't pretend to know all that's included there, but we're here for the more important questions anyway.

So Kedar, thanks for joining us. You joined Groupon roughly a year ago, give or take. You came into a marketplace business with a long history, a well-known brand, but also a business that's faced some headwinds for some time. So first, what has played out as you expected when you came into the business a year ago, what's been a positive surprise? And then on the flip side, what areas have you discovered maybe need more work than you originally contemplated?

First of all, thanks for having me. And it's almost in 2 days, I'm going to complete a year. And I just can't believe that it feels like first month on the job. I think one of the things when I came over, I came from Zappos -- known for customer service shoes and whatnot. But when I came to Groupon, it was like, "Oh, we are a deals marketplace and everybody wants to have the deal." and we entered into a period which was basically inflationary period. And so we were coming back out of this COVID wave and then inflationary period. And this is the worst period you could have as a company and think for us specifically because with our partners, they can raise the prices, they can have more customers coming in because everybody has money. And then they don't want to discount. And so I was loving the scale of the business. When we came in, we can sell everything, 20 million customers. I think there are very few companies who can say what we can say is that we can sell to 20 million customers, active customers. And then one of the challenges we have is like, okay, traditionally, Groupon, and this is not today or it has been in the past as well, customers come in for hero deals, when I say, and then they buy that particular hero deal then their expectation, like we just went through Black Friday cyber Monday, every retailer went through that. Imagine Black Friday, you are coming in, you're buying that particular deal and you are saying, "Oh, I need another -- this sort of Black Friday deal. Otherwise, I'm not going to buy into here." And that's the sort of expectation we set with our customers, that was the challenging part. So what I did at the beginning, we wanted to make sure that we go through the marketplace fundamental modification. What I mean by that is we wanted to make sure that customers, the buyer experience from us, they have the best experience. And what that means is like refund rate, we are putting the mechanisms to make sure that refund rate goes down. We wanted to make sure that customer service uptime and cycle times are really, really fast, where customers don't have to suffer through that. We also, interestingly, what we figured out in this particular process was around how to sell full price inventory. And that's a part which is very exciting to me. It is like Groupon always is known for deals. If it is full price, why am I'm buying on Groupon? Well, we actually created a value proposition for a customer to buy full price inventory on Groupon. And so going back, I think bigger problem we have in this particular marketplace was around getting customers to be aware of normal, everyday deals. We are everyday marketplace for local. And so we implemented some initiatives. And now I see that as like wow, these initiatives are starting to get root. Customers are browsing our catalogs, they're getting more aware. But there is still large cook-to-go. We have 2.5 purchases per year per customer. If we can increase the purchase frequency, which I believe we can, and that's where our purchase frequency-oriented initiatives are focused. So I'm very excited about how those pan out.

Yes. so it sounds like some encouraging progress even just first year on the job. But obviously, as a lot of investors know I'm sure you do as well, that turnarounds are inherently challenging. And your approach, frankly, if I'm being overly simplistic is looking to reduce the cost structure, which has been a key piece here, but also fundamentally improving the marketplace experience like you mentioned, getting customers aware that there are full price options, everyday deals and so forth. And some of that requires investment. So we appreciate the rationale of wanting to position for both growth and profitability, but help us and investors understand why the strategy of tackling both makes sense today.

So if we step back, Trevor, I think one of the challenges is like you have 20 million customers and you can only -- you sell all these things. Why it is so challenging for you to sell more things? While we are addressing that, we have merchant partners, and we have customers both -- we have retention challenges, which we try to address with these particular initiatives. But there is a bunch of costs in the business, when you build a business like a legacy business, that is not helping either merchants or customers. And that's the cost we are trying to take it out. And so our strategy is not oriented towards let's take the cost out as much as possible to make it profitable, even if sacrificing the customer satisfaction or more importantly, merchant satisfaction. And so we are very focused on making sure that merchants feel that when they're sitting on Groupon, it's an incremental transaction for them. And then customers feel that, oh, this is a selection in my local, I need to come back to Groupon because I didn't know that they have oil changes or trampoline or whatever. And so I think it can be done both. The lengths we are taking is where is the customer benefit and where is a merchant benefit. I will give you 1 example on this one. So for example, on the cost-out part, we have -- we are trying to do is take out the cost of our reps calling merchants and creating the deals. That's a very cumbersome operation. As a rep you are trying to reach to the merchant 4, 5 times. And it is not -- also, if you want to modify the deal as a merchant, you are like, "Oh, I'm going to call my rep," and that rep has 400 merchants assigned to them, so they are not going to get back to that customer immediately. And so for us, it was more important to say cost take out. We are going to look at the merchants and say, what is the problem? Oh, they want to modify their deal prices. They want to modify their deal description really fast. Okay. For that, let's give them self-service rather than a human in the loop in this case and take that particular cost out. So we are looking at the cost twofold, one, like these are add-ons for our business, merchant partners. And second, we are looking at technological costs. Since we built the platform in 2010, we built a platform in a decentralized way where you guys are selling concert tickets to a massage to card-linked offers and all these things, and we lost the discipline of saying, "Hey, where is the cost." And so we are trying to make sure that we put the cost only when it actually satisfies the intent of customer and merchant is really happy.

Okay. So it sounds like part of it is removing friction points and/or potential redundancies that have just built up over the years. That makes a lot of sense. And you alluded to it a little bit being a 2-sided marketplace serving both merchants and buyers' needs. So we often hear the debate of whether Groupon needs inventory first to attract buyers or buyers to get more merchants to come onto the platform. Frankly, I'm in the camp where you need both, right? It's not an either/or, it's a both. So first, on inventory, can you highlight some of the key successes you've had this year since you've been in the seat to get differentiated inventory and greater breadth of inventory?

Yes. I was going to say a great question, but you might have heard that comment in 10 times already. So I think this is one of those cases where we are looking at, say -- take merchant, okay? We have 20 million customers. Do we need more customers? Yes, we can have more customers. Nobody can say, "Oh, I don't have enough -- have enough customers." But 20 million customers buying only 2.7x in a year, is the factor that we can make change towards. So do I need to go and fetch another 10 million or 20 million customers? Probably not. But do I need to make sure that these merchants that they are what they are offering, customers understand that in their neighborhood and customers actually can take advantage of that. That's more important. So supply, we took -- I will give you 2 examples here. One of the example I was talking about earlier. Like, for example, we launched a self-service and now 75% in Q3, 75% of our new deals came through self-service. And so that's really great for merchants because they don't have to work through an agent and negotiate and all these things. You can just launch the deals really fast and see the performance. And then another initiative I will say is card-linked offers, for example, where we are looking to make sure that we launched a selection that is every day. It's high frequency selection in local as opposed to -- I remember Groupon, I did that 3 years ago or 3 months ago, and I don't know. I didn't find anything hero deal-wise. We are trying to address that specific problem, and that's why the food and drink selection, 10,000-plus merchants within 2 months, that's great for CLO. So we are looking at that.

And the key piece there is obviously driving the purchase frequency. But on the buyer side, what efforts are you making to draw new buyers to the marketplace or retain the existing buyers and then potentially reactivating prior Groupon customers that maybe have gone dormant for whatever reason?

Yes. So one of the things we have is -- I was actually chatting with one of the analysts who came, and he was telling me like, I used Groupon, don't quote me, it was 3 years ago. And I don't use it or I didn't use it after that. I mean they did a balloon, hot air balloon ride? The challenge was that when you come in as a customer and you did that particular event and then you went back to Groupon to do something else, you have no intent. You had -- the only intent you have is like I did this great ride on large discount and what are the other large discount items. And so what we are trying to make sure is that we understand the customer preferences better. And so if you did these things to do, what are the other things to do in your neighborhood that we can surface you? That's a customer experience 101, but we have been surfacing the aggregated trends rather than individualized trends that we are getting better at. But more importantly, what we did is that now we are giving these particular customers 2 different types of options. One, we are giving them Groupon Bucks. And so these customers now come back and they say, "Oh, I have $20 to spend or $10 to spend on Groupon. Let me browse the catalog." And so now they are looking for what is around me rather than be only dependent on our algorithms to say, hey, customers, we are going to show you the exact right thing. We also have customer incentive there. And then we also did something which is really cool. We actually can do the targeted promotions for you. And so for example, you bought a kids deal. Then I can say for sure that you are a kids customer. And so rather than waiting for you to come back and say, "Oh, I'm going to look at 50 other deals which are hero deals." I'm saying, here is a $10 for you, go buy the trampoline portfolio. And so we can be very precise with subset of our customers...

It's getting much more targeted.

Right. Or if they are generated, then they are actually browsing our catalog. The last thing I would say is that, this is about the supply. We are trying to make sure that we have the supply that you need on our platform. I can go into more details around that one, but I'm sure we will talk about that.

Yes. So it sounds like good progress so far, but more work to do, both on the merchant side, the buyer side. Damien, to start getting you in the conversation. As we look ahead to next year, you've guided a 15% to 20% EBITDA margin and $100 million in free cash flow, which is predicated on a further rebound in local billings versus '19 levels. Big picture, what needs to go right to hit those goals? How much is some stability here in macro versus within Groupon's own control?

Yes. So let me unpack that one a little bit there for you, Trevor. The 2023 numbers and targets that we put out there are predicated upon 2 factors. First, we're taking significant cost out of this business. We're well on track here. And as Kedar kind of highlighted, we're transitioning in a way that's business enabling, whether that's automating workflows, using self-service for our merchant partners in simplifying our tech stack. And number two, driving higher local billings. 2023 numbers assume local billings at 60% recovery to 2019 levels. That's inclusive of a few points from price and refunds from where we're at today. And also, as Kedar highlighted, we're seeing some early wins, and we talked about also in our earnings materials from some of the initiatives that we've been testing to improve our local marketplace and unlock purchase frequency and purchase velocity. As we get more of our top line going, that should translate to much better flow-through throughout to our P&L and our cash flow statement than we have in the past and provide -- and deliver those adjusted EBITDA targets as well as free cash flow. Given our marketplace model, as we get -- as we see top line expansion that does provide some net working capital tailwinds. Now you also mentioned kind of macro components. And I'm sure -- Kedar mentioned, this past year has been one of the tougher economic cycles for Groupon, given inflation, given labor dynamics, given merchant proclivity to discounting. We're encouraged by some of the more recent conversations that we're having with our merchant partners, particularly on the enterprise side as they look to come back on the platform and use us as an important distribution engine for them. But that being said, we know we can be a great utility for the local marketplace, both on the consumer side and on the merchant side, even if macro conditions get tougher. By that, I mean for -- as a 2-sided marketplace for our consumers who may become more value-seeking to stretch their hard earned dollars on things to do, food and drink across our local verticals and then merchants who are looking to fill demand. But at the end of the day here, we are -- the local opportunity in front of us is pretty vast. And we're going to be -- and we're building a marketplace that can succeed in all economic cycles.

That makes a lot of sense. I'd be a little remiss if I didn't ask the near-term performance question. Can you share anything on recent trends? How did we exit October? Anything going on in November, December that you can share?

Yes. I'm sure that's a top of conversation here throughout the conference, what's the status of the consumer? What are you seeing thus far in the fourth quarter? And why I can share on the Groupon side is a little bit about those factors that we've seen thus far in the quarter. So this morning, we posted to our -- a slide to our Investor Relations site that gives some insight into monthly performance levels. So in November, our global local billings was 56%. On FX-neutral basis as a precedent of 2019, that's up a few points from where it was in October. That being said, in December, we are observing a small pullback in performance more in line with what we saw in October. Note that at October performance, the performance that we've seen thus far in the fourth quarter is an improvement compared to where we were in the third quarter.

Okay. So it sounds like maybe a little progress, maybe giving a little bit back in December, but by and large, starting to see some improvement.

Yes. And look, there's still a lot of quarter to play out, of course, a lot of important buying season. For those listening, encourage you to shop on Groupon. Don't have to worry about delivery or any logistics expenses, give a Groupon, put in the stocking. It can be a great experience for friends and family.

I appreciate the near-term update. I want to get back to some of the cost commentary that we were talking about before. A lot of moving pieces ongoing, rightsizing of the tech organization, reducing some facilities footprint, reducing sales force as well as some onetime cloud migration costs that won't repeat next year. One of the concerns we hear from investors is that continual cost savings can run the risk of cutting too deep and limiting the company's ability to actually effectuate a turnaround. So what gives you confidence that these cuts aren't going too deep, that the further simplification of the business can withstand it and you can actually pivot to growth in even a stable macro?

Okay. So one of the things you have to look at where we are doing the cost cuts, and we always have this hawkish eye. So for example, I tried to give this parameter internally, which is our cloud cost per transaction is 3x more than another public company and so we have a big goal that we can achieve in the cost cutting without actually affecting the customer experience, [ that much to say ]. And so there are lots of these particular micro things that you can look at and say, is this -- again, the length is pretty simple. Is this actually benefiting customers? Is this actually benefiting merchant partner? And if not, why is that cost there? And I think we carefully are on this journey to make sure that our merchant partner satisfaction goes up. None of these things -- because our challenge in the marketplace previously was like you are creating a hero deal, 40%, 50% off. Merchant is -- wants to repeat those particular customers, but then the customer is looking for another hero deal. And so the repeat factor is going to be challenged. But now it's like, oh, you did this 1 particular deal and here are the smaller discount deals and customers are trying to take advantage of that. So we are always going to be looking out for internal parameters on customers and merchant retention. And that's where we make sure that cost doesn't get into that.

Okay. So it sounds like to put a fine point on it, you're not particularly concerned about cutting too deep because you're still focused on the customer experience, the merchant experience and so long as you're not negatively impacting that or potentially actually improving that, removing friction points then that's the right cut to make.

Yes. I will give you 1 additional example here. We talked to our sales force, right? Like we cut through the sales force, we have self-service and whatnot. But another factor here is that we had the sales force, which was like -- how does this change this for customers, okay? So you -- and no offense to anybody who is from Boise here. But if you are from Boise, Idaho and we had this hot air balloon event there. And so you bought that particular event. And then you are like -- came back to Groupon and say, "Oh, now, what can I buy on Groupon? Nothing. All you can buy is goods and whatnot. That's not a great experience. And so we are making sure that we operate -- and this is 101 on a lot of these particular marketplaces, which is the network effect gets unlocked when you are focused on certain geographies. And so we are retraining our sales force to go after the locations that are very top of the mind where we have customer density and so merchants will benefit from that as opposed to just getting the revenue in some particular vertical that we cannot unlock the network in -- we need to stack.

It gives some breadth to it. That makes sense. Damien, just back to the free cash flow commentary, and you kind of alluded to some working capital benefit. Obviously, in 4Q, you've guided to positive free cash flow. You have the $100 million figure for next year. Just looking ahead, do you expect to generate positive free cash flow every quarter? And do you need to be positive every quarter to hit that $100 million goal?

Yes. So stepping back, a lot of the commentary there is we are building a financial model that can sustainably and reliably deliver free cash flow. That's our goal. And in the fourth quarter, we do expect to generate positive free cash flow, although slightly lower than 4Q of 2021 and while that our -- you touched on the seasonal net working capital benefits, while there are some -- with a smaller goods business, we're less seasonal than our historical pattern. So that's coming in or coming -- going out of the fourth quarter, be a little -- play out a little bit differently. So going forward, 2 things to know about our free cash flow position and profile. One, net working capital will close -- will track more closely with our local volume where we do expect to make these sequential progress, and we talked about a little bit of that today. And number two, our cost actions that we've also highlighted is going to put us in a better position to sustainably generate cash on an ongoing basis. So big picture, we're focused on delivering that $100 million number in 2023.

Okay. And in the context of getting back to that sustainable free cash flow, just remind us where we stand in terms of cash on hand, sources of liquidity and just overall balance sheet health.

Yes, you got it. And so as of September 3, we had $308 million of cash on our balance sheet. That did include $110 million drawn on credit revolver. We renegotiated our credit facility in the third quarter and also to provide a little bit more flexibility in the near term as we navigate this turnaround. Additionally, we're executing well underway on our cost takeout actions. That's going to put us in a much better position going forward. I'd also remind you on our balance sheet that we have minority -- passive minority stake in SumUp, it's a 2.29% ownership stake, and that can be a source of capital for us in the future. So net-net here, we believe we position ourselves well. We have some flexibility in the near term as we navigate the turnaround and uncertainty and laser-focused on generating cash flow organically on a go forward sustainable, reliable basis.

Got it. So just to recap, potentially flipping to positive free cash flow, you seem pretty confident on that front. Cash on hand, available credit facility, which was just renegotiated as well as a potential minority stake to monetize. So a lot of different levers there to rely on even if we're in a challenging macro environment.

Absolutely. You nailed it.

Got it. That's super helpful. And before I get to my last question, if anyone in the audience has a question, just raise your hand. So much of what we've already talked about here has been within the context of the local category, which you flagged as probably the biggest opportunity ahead for Groupon, but you also serve goods and travel use cases. And while both are much smaller than local in terms of their billings, they're both GP positive. Can you just provide an update on where we stand with those 2 verticals and why it makes sense to keep servicing both of those versus really focusing your attention on local.

So this is a question which I get a lot around goods and travel. I think one of the things we have to understand about our businesses, we are customer oriented. And so if the customer wants to start from the goods but then they convert into local, that's a very good doorway for us to do the cost acquisition on a much cheaper economic scale. But the people -- customers come in to buy goods or travel in terms of discovery from us. It's not like you wake up and you say, I need a printer, I'm going to go to Groupon to buy a printer. That's not an intent. They look at something and they say, "Oh, wow, these new, whatever, TikTok pants. I never knew that they exist. And then customers buy that. . And so our goods and travel businesses are complementary now, and they are both GP positive. And so they will continue to be there as long as they help our local business but to cross over. We are not focusing on adding more inventory or taking on inventory. We are in third-party business. So our whole discovery in the goods is make sure that customers find it interesting, and that's how we bring it up.

And bring them into the ecosystem. Got it. So almost in lieu of customer acquisition costs through other avenues. Got it. Great. That makes a lot of sense. It looks like we don't have any questions from the audience. So I think we'll wrap it there. But Kedar, Damien, thank you so much for joining us.

Thank you.

Thanks for having us, Trevor.