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

So Nick, maybe I will do one step back and before I will be talking about the marketing strategy. I would also like to mention that one of the reasons why we need to build this like Formula 1 car engine is to have better capability to cover unmet needs. And we have products right now on Groupon, which are serving well to some merchants in some categories, and we have categories where we still have an opportunity. One of the nicely growing segments is things to do where, for example, what we are quite often doing is that we are connecting our merchants at the best possible price, which we offer, but it's not a unique price typically. And we just connect to whatever they operate with, then we understand what are their needs really, and we build special products. For example, we find out that they have empty afternoon, so we built something unique on top of their proposition. This is a muscle and capability which we need to bring across the board because this will give our merchants a reason to be on the Groupon all year long, even in the periods where they simply don't need anything special, but they will be part of our inventory. And then they will have time areas, days of the week or simply they will need some change in the pace of the business. We will be where we can boost the business for them. So this is still the piece which we are building, and I expect that we will be bringing many new features, options, products for our merchants. On the marketing piece, there are several elements. We were talking about influencers recently. Actually, it was also one of the Tesis which you were coming with to Groupon. Everyone knows Groupon is true only for people over a certain age. I'm not sure that it applies for people who are 20 or 25. So -- and the reason is very simple because like Groupon was not really growing last few years. that huge boost you were talking about was really over 10 years ago. And the new generation is simply searching and discovering products on the Internet in a different way. So one part of our marketing effort, which we need to do and we are working on is to come back to influencers, build a strategy for TikTok, Instagram and our social networks and show them the product. And even here, it means that we need to be working on the product and improve the product because like young generation doesn't want to pick up a phone and call to do the booking. We need to have much better connectivity, and that's why we are investing into connectivity to our partners to make it very seamless, very simple. And then in the middle of this is the piece, and you also touched it, and I consider it like super important, and that's trust. It's not like directly marketing, but like our experience is that marketplace works only when there is trust on both parts. Merchant trust us and consumers trust us. And let's be honest, it was not always the case with Groupon. The motivation was quite often just to generate revenue, get the deals sold, and that's pretty much it. We are changing it. I was talking on earnings call and in several other communications afterwards about our bet, which we are making on trust and quality. It's -- from the short-term perspective, it may have like negative financial impacts because we are taking down deals from our marketplace. We are actually refunding people more than before when they are not happy with the service. Obviously, we prefer to refund in Groupon box when they do another purchase. We are going to merchants and telling them like, well, we need to change something here because this is an issue for your customers. That's why they are not coming back. But with this, I see -- and like I measure it in very like simplistic way on top of what the team is showing to me, like I'm counting number of e-mails, which I'm getting every week from our customers who are complaining that you did this, you did this, and I don't think it's fair. Like when I started in Groupon, and I think that number was very similar even last year, it was like 30-plus conversations every week. And Giovanni [indiscernible], who is running this bed with us, he was like asking me, is it true that like last week, it was just 2. And yes, it's really tenfold, we increased number or decreased the number of people who feel that they are so desperate that they need to find the contact on the CEO of publicly traded company to just show what we do wrong. So that's part of our bet, part of our mission. And it will take time, but like it will bring this compounding effect that people will see that we are doing a good job for them. We are delivering value. And then they will be coming back and it will be helping the purchase frequency and market price flywheel.

Nick, I want to make a few additional points here because I think this is an important point that like allows us to communicate a few different things within like the example Dan just went through. I think one is you commented about 2019, 2012, all right? And I think that the big picture from my standpoint and the seat I'm in is Groupon came around at a time when small businesses were dealing with a shift in the way that consumers went to discover what they wanted to do offline. And at that time, it was offline print, TV, radio to online and Internet. And they didn't know like it is what Dusan said earlier, typically, the small business or experienced operator, they get into the business because they love that experience. They are -- or they're trained to deliver that or they're hospitality oriented. They're not digital marketers. And so we played a role for them. Then our business, we got defocused. We got big. We tried to compete in a lot of different playing fields, and we stopped focusing on that customer. And we started making decisions that we're reducing that value proposition. We didn't evolve with them as the market has evolved. And -- and so like you fast forward, the same thing is happening now, okay? Consumer small businesses everywhere are -- they read -- they're some of the smartest people you will find and they -- we consider them our partners. And they're reading, they're like, how are we going to solve this AI thing? They know that traffic is moving and they want to make sure that they can be discoverable. And so to me, this is -- listen, I don't really look at backwards. This is one of Dusan's gift. He's always about like let's go forward now as to how do we improve from here. But I think the big picture from what made Groupon great in the past, I think those conditions are on the playing field today. But then it's a question of what are we going to do about it, right? How are we going to execute? And this is where I would just say 2 small things, okay, on this trust and quality piece, which Dusan's hitting on. It is a great example of how we're deploying the company harness at scale where when every day now and the team that's joining this under Giovanni is one of the most AI native teams we have, they're not like they are able to see every morning. Here's all the customer data, here's all the complaints, here's all the feedback. I want to get an oil change, and that guy charged me $5 extra and wasn't in the fight print. And right away, they're able to decision, okay, what do we do about this to solve this for our customer. And doing that at scale across tens of thousands of small businesses across millions of orders, it's not something that our company has ever been able to do. And it's one of the things that AI and AI native experienced operating teams are able to solve. The second thing is performance -- is the marketing fund. And this is more of the DNA of our company that we're building, which is we want to go step by step here. A different CEO may have come in and said, you know what, we're going to go put a $100 million on a big brand campaign. But the way that Dusan has always built businesses is from first principles, step-by-step building the foundation. And for him, he wanted to make sure we optimize the people that are lower in the funnel, who are already searching for these things so we can make it easier to convert and have it be more profitable ROI. And then as we improve the trust, as we improve the product, then we are, frankly, earning the right to spend investor capital in mid-funnel and upper funnel strategies to unlock the latent potential you see in this brand. So I think this just gives you some flavors for how -- not just how we're executing on these topics, but just how we think about transformation here a bigger picture.

So small businesses spent 15 years learning how to use Google ads, and you're saying that now they're like, oh, there's a new paradigm. And it's the same sort of wave. Now to the we, you guys came on in 2023. It was left here for a while. And -- but it's -- the business, you're recognizing that you have to own the brand despite if people dropped off thinking about it in 2016. So you're talking about sort of a more full stack approach of thinking about the value for businesses. When it comes to consumers, you mentioned a $1 trillion opportunity, Dusan, can you just identify what that is? Is that experiences fulfill the mine?

This is the third-party data around what the local economy for experience and services is globally.

Okay. Awesome. So on the marketing piece, I want to get into some of the financial stuff, but actually stop. You mentioned [ Giovanni ]. What is the talent acquisition be like? Obviously, you've mentioned your cutting costs, but also I'm trying to do the math on the model, right, and where the cost is going. And you mentioned, but we're using this money to hire new people. And I think specifically, you said talent density. So what does that look like over the past 2 years?

Yes. So when I joined Groupon, we weren't able to hire people in the United States because everyone told this is like a dead horse. So we were hiring people in Europe, mainly based on a Pale Fire reputation, my reputation here, and we were able to build really decent team who did a great job and really saved the company. And it was not Czech Republic only. We have a really great team in Madrid, in Spain, in Valencia, in other countries in all over Europe, where Groupon has offices. Then when we switch to the new phase with AI, focusing us to be AI native company coming with different stories, it unlocked also the different level of talent across the world, which we were not able to get before. So suddenly, we are able to hire people who have Uber experience, people who have Klarna experience, people who have DoorDash experience and it significantly helps. At the same time, it fits into the strategy Groupon. If you work in Groupon for 1 year, I think you get more experience in any other company in 5 years. We like internally, what we are talking about is like we want to have speeding tickets, no parking tickets, which means that we are unlocking parts growth to people everywhere. This is ideal environment. If you are young, hungry, smart person, come here in 1 year, you can have 5 different jobs, work in 3 different departments and end up with finding something which will be your passion, and you will have their P&L responsibility, which you would never get in traditional corporation. And I love this part because when I really see someone young who's all new here, and I'm coming with some idea, and I think, yes, this is a pretty good idea and that person comes and tells me something better, I say, yes, this is what we want to build here, to have people who are coming with great ideas are learning. And now how it moves to talent density. I think this company culture, performance culture is and will be attracting more and more people and not only people who are like senior, but really, we want to have more with like hungry people who want to grow, be with us, be part of this experience. And this environment is also attractive for senior people who are hungry. I don't want to add here just the team of people who have experience from whatever a great company. At the same time, they still need to have this like high agility, they need to be -- having -- they need to have a mindset that they want to learn something new every day. And I see that these people start coming and they are coming not only in Europe but also in the United States. So [ Gopani Lajas ], which we were talking about is in Europe, but he has its car experience, Uber experience. He brought several people -- was able to hire several people onboarded and find some internal talent in Groupon and [ Woodway ] did with customer support in a few months, it's amazing. We completely reset the expectations, raised the bar and is one of the best performing AI teams in the company. On the other hand, we have Adi Rajkumar, who joined Groupon as COO, DoorDash, like great experienced guy who is bringing life experience. And at the same time, he is hungry and bringing that piece because he was part of the DoorDash growth. So very, very relevant, local marketplace, successful company playbook and the person who wants to do something similar or better at the same or bigger scale with us. So amazing. And we have more and more examples like this.

And Nick, as from the investor hat, like you may say, okay, well, why does this matter? Like why are you guys spending money attracting best-in-class talent? Like to me, this is where I think in order to leverage the full potential of AI, you need best-in-class AI native operators. What we see here is the speed and the -- let's say, the standard deviation of team speeds is increasing as people adopt AI. There are some engineering teams, there are some operations teams, there are some marketing teams. The speed they're moving is incredible. And then we have other teams that are frankly behind our expectations. And the single ingredient that unites this is talent. And so like for me, it's great, like I've been really -- like I track our talent cohorts every 6 months, and I see us getting better and better at this. And what I see is a common thread amongst all the people who are joining, it's exactly what Dusan say, they see ride-hailing, maturing, consolidating, food delivery, maturing, consolidating, hotels maturing and consolidating. They know how to run experienced marketplaces at global scale within the complexities of solving it at the local level. And they're looking where can we go take this into the next chapter, the areas we operate in are still secularly underpenetrated. Some third-party research that says for things to do. Only 1/3 of things to do experiences are still booked online, and that's crazy to imagine. But that's the -- that's sort of the ingredients that could allow for a secular growth. And for us, market share growth because we know that we're not doing our best. And we found that, that resonates with really ambitious people who are talking about, well, I've seen a company grow multiple sized times the GMV. Today, we're not a huge company. We're $1.7 billion of GMV, but the market potential to take that multiple times higher and then the marketplace business model which has great characteristics that is like what gets people really excited to come join us on this mission. And so like I, as a finance guy, I'm very, very much excited about underwriting talent density as one of the key themes for us to build this platform to make us execute and realize the opportunity we see in front of us.

I would slightly double down on what Rana said because you can read it quite often, but like we really see it, and it's really amazing. In the past, you could use brute force because like your best people were 2x, 3x versus the average population that's completely gone. The landscape is different. Now it's really time when you see like 100 Xs and I am super convinced that successful companies of the future will be around these people. And our motivation is like to create an environment that they will be able to grow. We are here as some top management unlock old blockers. Quite often, we have people who are coming from other companies and telling us that they were not allowed to use AI fully. They didn't have access to data. And when they see would we allow to do them just happy in this environment? And this will be one of key drivers for us going forward.

So the costs have gone down, headcount has gone down. Average salary has probably gone up. If we're looking at the marketing component of it, that's $40 million in the last quarter. Where have you said publicly that you can -- do you see that as a percentage of revenue going? And if you could just describe it and color it in as sort of what -- because I see a mix shift, I see you're cutting SG&A and other costs, but that is growing, albeit down from 3 years ago, significantly, but it's starting to grow again. And what I see on the financial side is like, well -- and you see this in start-up companies you guys are acting and appealing like a start-up company that's publicly traded with $225 million of cash. If you are buying growth, it's not necessarily growth. What are investors looking for when it comes to the percent of marketing? And what are you seeing on the of your paid channels? And how do you expect that to develop over the...

Dusan, do you want to take the philosophy, I'll do the numbers? Or how you want to do it?

Yes. So start with numbers, and I will give them a big...

Yes. So like, Nick, I think the way we see the business is, if you look at it at a customer level, and we have approximately 16 million customers that have bought with us in the last year, when we got here, what we see is that like we have a core base of loyal customers that are -- we call them our champions. We also have regulars, the champions, they're buying, let's say, 5x plus a year, and they really are getting the value from the position. What we observed at the time was like we weren't really doing new customer acquisition. We had to fix a lot of things, right? This is where you're building the house or the other analogy is fixing the plane mid-flight. So we'll be going back to first principles, what do we want to solve under our CMO, Joseph and Dusan, we have built really, in many ways, a best-in-class acquisition machine in the lower funnel. And so over the last couple of years, we have largely solved acquiring customers. Now there's a lot of opportunities for improvement. Don't get me wrong, but we have shown that we can acquire new customers at really attractive cost of acquisition relative to these champions and regulars lifetime values. Where we have struggled and we're very open about the struggle is the -- that first purchase converting it to that -- and that new customer, converting it to that second, third, fourth customer purchase, and becoming those regulars. And when you go, okay, well, why can't you just solve that? It starts to go back to the underlying issues around systems, processes, people and really, what do we need to solve? We need to solve the customer experience, the onboarding experience, make sure that they are able to properly get what they want and not be inundated with noise. And so this is for us, like when you're asking the question, where are we in marketing spend? Like largely, it's a dial, and we can spend sort of what we want in terms of cheese what we want in the current Pareto curve. What Dusan and I are most focused on is how do we push out that curve. And the unlock for that is building better life cycle management around that first purchase to that champion. And for that, like once we get to that, if you think about it, right, like just what you see is the spend as a percent of full revenue. But the second and third and fourth purchase, the incremental margin on those is much higher because you're not spending that same acquisition budget. A lot of times they're coming to you directly or through your managed channels. And so those -- that's the way we get leverage on the marketing. I think it's -- from an investor, it's a great focus area because we have a lot of operating leverage in our business. The way we unlock this operating leverage and get scale on our marketing dollars is fixing this area. And it's one of our highest priority projects that we're running AI natively. We have some stuff out there in social around what we're doing around personalization amongst other things. And this is something that we will be updating investors every quarter. I think we have a lot of experiments. I wouldn't call -- I'm not ready to declare victory on it, but I'm very encouraged by the progress and we will keep you updated on where we go with that. Dusan, do you want to add anything else?

Yes, I would like to. As a part of fixing this acquisition engine, when we started, we were -- we didn't have even visibility into data to really understand like what's the difference between one and second customer about the deals, the engine, which we have right now, we understand which campaign is acquiring what profile of customer, what's their lifetime value, what's their purchase frequency. So finally, and without AI being able to dig so deep, we would never be able to build it. We have tens of thousands of campaigns. We understand like whether we should be spending more on this campaign because like the customers have 2x, 3x purchase frequency in a year or 1x, for example. So we are -- we optimized it for short-term ROI. I really think that this is, if not best-in-class, one of the best performance acquisition engines. And now we are switching it that this is not just like acquisition engine working with short-term 7-day window. But this purchase frequency element, which we are talking about everywhere now internally and also externally, we already have it as a part of marketing. And for me, this is extremely important. I was explaining in the beginning that like when I was building companies, I was not getting external money, it was bootstrapped and all that stuff. I think that I have quite a good feeling when we are ready to invest. I would never invest and do channel campaign if I don't believe that we have unit economy, and we will create a value. So you -- I will not give you a percentage number. But like when I will see that this acquisition purchase frequency engine works, then I would like to invest as much as possible. Now we need to run it with some hygiene. The number is moving slightly because I really believe that the trend which we have here is good. But once we will be ready to come also in front of shareholders and actually talk about like huge increase spend, it will be for me, 1 of the best movements because like my internal trust that we crack the purchase frequency at that moment will need to be like close to 100%.

That's one of the things I went activist on. So as an investor thesis, I'm not talking about user growth. I forgot to make the comment that I dated myself saying everyone knows Groupon, and now I'm on TikTok, so messed up a little bit there. But if we're talking about 16 million users, just make them go further, right? And in order to do that, redesign, you guys are doing, recommendations, recommendations were awful, no offense. Now they're getting better. And the friction, the friction to the purchase. So all of that, solving all of that simply, you pay $30, $50, whatever the number is, for a customer. Yes, the first purchase, maybe you lose money, maybe breakeven depending on the channel. But it's really about the second customer because you have 90% gross margins, right? Then we can talk about growing users. We can talk about potential unlocks for businesses, being a value CRM of sorts. But can you talk about the operational leverage before we wrap up, Rana? Talk about sort of when this business grows, not single -- low single digits, but 10%, 15%. What does that mean for financial performance? Do you think we're seeing the operational leverage today? What should investors that are trying to do financial analysis pay attention to?

Yes. I would say 2 things here, Nick. One is that I think you described some of it is that just understanding our business model, we have 90% gross margins. We have around a 55% contribution margins, and we have a fixed cost base, which we can leverage. Now when we got here, we took down those costs and so we could get the business healthy. And we -- but from there, our kind of view is we still have quite a lot of opportunities on the cost side, but we also see a lot of things we want to invest in to accelerate. And so for me, like the big picture, how do we create a lot of value here and all of us around the table, this is our singular focus, is we see that if we can get the engine running and what you're talking about is how we see it, this is a large market opportunity. This is not a time for optimization. This is a time for driving billings growth in the right way with customers who are onboarding and engaging and repurchasing that business model has the opportunity to leverage a fixed cost base. And when you start dropping that incremental purchase at 90% or it's not exactly because we may have some remarketing costs associated, but it will be very accretive. You will see that EBITDA growth will be faster than revenue or billings growth. And for me, this is where -- but it's tough for investors because it's like, okay, it makes sense, it will -- show it to me, but it goes back to first principles. You can't just do that until the marketplace is healthy and operating with the right flywheel. And for us, like we're not ready to guide to 2027 and yet or anything like that. But our principle is you look at how we've managed the business over the last 3 years, and that gives you a sense for how we will manage it going forward. We are people who will like invest against where we believe they will have conviction around. There's a good investment opportunity. We're not always right, but we're also not like spray and pray type management team. And so I think that gives you a little bit sense of the operating model.

Yes. I also think they don't understand how much more EBITDA or free cash flow goes up, given 10% billings growth and free cash flow goes up higher than the EBIT.

Well, Nick, like I said, you can look at our past. We talked about the negative growth rate when we joined, you also look at our EBITDA. And so over the last 3 years, we have shown not just improving growth rates, but we've also taken our EBITDA up as well. And so that's where finding the balance for us is over time, like where our #1 KPI is really inflecting billings, orders, purchase frequency and over time, active customers, like you said, that's the primary goal for us. And then -- but we're highly confident knowing the underlying business model of how marketplaces work that when you solve that, we can turn this into a cash machine, and it is already generating cash.

Yes, as a percentage of market cap for sure. If the company grows 10%, people should model it out, figure out the probabilities. There's risk in every investment. You're dealing with guys that got into the fire. I think the financial performance says they righted the ship and the question is, can you execute? And very excited to see this process through you. I really appreciate you guys talking to me. I get some questions from hedge funds like why are they doing this, right? And I just point to the Goldman Sachs TMT Conference, and I look at the JPMorgan Healthcare Conference. And the thing is that those sell-side analysts, they write milk-toast vanilla. They don't put their money at stake. And quite frankly, it's usually not worth reading. I think it's forward-looking for you guys to engage with a Substack author, which some people might pejoratively say, but I'm quite proud of. And I hope that investors, potential investors, other entrepreneurs enjoy this call. I think that it was great. We clearly went way over. I really appreciate it.

Nick, thank you for joining us. Listen, I cannot speak badly about my sell-side partners or institutional investors. We enjoyed the opportunity to come tell the story. We have really enjoyed the feedback we received from you and other engaged shareholders. Like Dusan, based on how his Pale Fire business is run, like this is really, for us, like we look at this as a partnership between all of our investors. We just happen to be active managers of -- but we're really shareholders along with you guys. And so we're always open to feedback in any channel and a conversation in any channel. So we really enjoyed that. Anyone who has feedback, please hit me up on Twitter or X, and we'll continue to improve from here. So thank you, guys. And Dusan, anything you want to say in the end?

Nick, really, thank you for inviting us here. It's a great format and it's great to hear and get feedback from small shareholders, all shareholders actually. I would just mention on top of what Rana mentioned, it's a great communication channel also for our team because this is really for the first time that we are getting ton of direct feedback from you, from so many other shareholders, our teams internally are really trying to show what they are building. So you actually started with the wave of openness also in Groupon when we are proudly showing what we have. We have a ton of great stuff inside. We need to do a better job in selling it and presenting it to everyone else in the outer world. And you really ignited that, and thank you and all the people who are participating and who are shareholders of Groupon with this with us.

I appreciate it. It's a different shareholder base. It's not so focused on the next prints and what real-time data says. Last question I have for you guys. I've gotten like a dozen questions about an...

We've got to run, Nick. Okay. All right.

Is there an internship policy? I mean, program.

Well, listen, we get ideas every day. We don't have one formal, but we have a new Head of People here, Nick Walker. He is great. And I'm sure I'm happy to take it offline with him and you and see if we can -- the story for us is clear. We want ambitious people who are super passionate about the mission we want to serve and want to become AI-native best-in-class experience market operators. And if you feel like you fit that boat, like we would love to have a conversation.

Awesome. Thank you, guys.

Thank you.