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Groupon, Inc. (GRPN) Q4 2019 Earnings Call Corrected Transcript 19-Feb-2020 Groupon, Inc. (GRPN) Q4 2019 Earnings Call Total Pages: 20 1-877-FACTSET www.callstreet.com Copyright © 2001-2020 FactSet CallStreet, LLC Groupon, Inc. (GRPN) Corrected Transcript Q4 2019 Earnings Call 19-Feb-2020 CORPORATE PARTICIPANTS Jennifer Beugelmans Melissa Thomas Vice President-Investor Relations, Groupon, Inc. Senior Vice President, Chief Accounting Officer & Chief Financial Officer, Groupon, Inc. Richard Williams Chief Executive Officer & Director, Groupon, Inc. ..................................................................................................................................................................................................................................................................... OTHER PARTICIPANTS Eric J. Sheridan Ygal Arounian Analyst, UBS Securities LLC Analyst, Wedbush Securities, Inc. Deepak Mathivanan Brian Nowak Analyst, Barclays Capital, Inc. Analyst, Morgan Stanley & Co. LLC Thomas Forte Michael Ng Analyst, D.A. Davidson Companies Analyst, Goldman Sachs & Co. LLC ..................................................................................................................................................................................................................................................................... MANAGEMENT DISCUSSION SECTION Operator: Good day, everyone, and welcome to Groupon's Fourth Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the company's formal remarks. [Operator Instructions] Today's conference call is being recorded. For opening remarks, I would like to turn the call over to the Vice President of Investor Relations, Jennifer Beugelmans. Please go ahead. ..................................................................................................................................................................................................................................................................... Jennifer Beugelmans Vice President-Investor Relations, Groupon, Inc. Good morning and welcome to Groupon's fourth quarter 2019 financial results conference call. On the call today are our CEO, Rich Williams; and CFO, Melissa Thomas. The following discussion and responses to your questions reflect management's views as of today, February 19, 2020 only and will include forward-looking statements. Actual results may differ materially from those expressed or implied in our forward-looking statements. Additional information about risks and other factors that could potentially impact our financial results is included in our earnings press release and in our filings with the SEC, including our annual report on Form 10-K. We encourage investors to use our Investor Relations website at investor.groupon.com as a way of easily finding information about the company. Groupon promptly makes available on this website the reports that the company files or furnishes with the SEC, corporate governance information, our quarterly stockholder letter, and select press releases and social media postings. 2 1-877-FACTSET www.callstreet.com Copyright © 2001-2020 FactSet CallStreet, LLC Groupon, Inc. (GRPN) Corrected Transcript Q4 2019 Earnings Call 19-Feb-2020 On the call today, we will also discuss the following non-GAAP financial measures: adjusted EBITDA, adjusted EBITDA, margin free cash flow, and FX-neutral results. In our press release and our filings with the SEC, each of which is posted on our Investor Relations website, you will find additional disclosures regarding the non-GAAP measures, including reconciliations of these measures to the most comparable measures under US GAAP. All references to SG&A in 2018 exclude the charges for the IBM patent litigation. As we discuss our results during this call, note that all comparisons, unless otherwise stated, refer to year-over-year growth as reported. Our gross profit comparisons are FX-neutral, including gross profit per customer. And with that, I'm happy to turn the call over to Rich. ..................................................................................................................................................................................................................................................................... Richard Williams Chief Executive Officer & Director, Groupon, Inc. Thanks, Jennifer, and thanks to all of you for taking the time to join us today. In addition to this call, we've also issued our fourth quarter release and quarterly letter to stockholders. I hope you'll take the time to read them both and review our slide deck, as they all go into significant detail about our results and strategy for 2020 and beyond. Our fourth quarter performance was disappointing by nearly every measure, and failure to meet the financial expectations we set will understandably frustrate our shareholders, as it has us. This performance shortfall, coupled with the significant headwinds we faced, call for profound change, and we're taking immediate and decisive action to return the company to growth. We worked with our board and external advisors to develop a strategy and execution plan to unlock the potential in the platform and assets we've built over the last 10 years. We believe that our plan can return Groupon to high single digits billings growth by 2022, while expanding adjusted EBITDA margins. Our strategy is simple, turn Groupon into the local experiences marketplace. This means planning a quick exit from the goods category, dedicating resources to expand our local experiences marketplace, and executing a new course of action focused on four core priorities. First, building high-quality inventory density in core cities and bringing on merchants' full catalogs; modernizing the mobile experience for customers and providing new tools to help merchants grow their businesses; relaunching the Groupon brand and marketing strategy to move from deal-centric to a local experiences marketplace; and reducing our costs and rightsizing our spend to support our go-forward business. We will be laser-focused on the biggest opportunity for Groupon and where our true strength lies, local experiences. It's $1 trillion opportunity. We had $3.4 billion in billings related to this market in 2019, and we are clear leader in this space with significant scale. This is where we can grow. This is where we have the right to win. We are very excited about our go-forward opportunity, but obviously, we have to acknowledge our fourth quarter and full year performance shortfalls. Heading into the fourth quarter, we set expectations that we believed we could achieve based on our accelerated pace of product launches and other execution successes. Our North American Local business had momentum as we exited the third quarter and unit performance had improved steadily each month of the quarter. Midway through the fourth quarter, it became clear, however, that we were seeing far fewer customers engaged with goods, and it impacted overall traffic to our site. The lower traffic ultimately impeded performance in all of our categories. This was particularly notable in November and affected our holiday peak period, when goods engagement has historically been a business driver. 3 1-877-FACTSET www.callstreet.com Copyright © 2001-2020 FactSet CallStreet, LLC Groupon, Inc. (GRPN) Corrected Transcript Q4 2019 Earnings Call 19-Feb-2020 Adding to these challenges, certain conversion initiatives in Select did not deliver on expectations. Our traffic declines and these other factors, which Melissa will discuss in greater detail, combined to create a headwind that we could not overcome during the fourth quarter. Before I discuss our strategy, let's touch on Goods. Our management team and board have been evaluating the role of Goods for some time. Our fourth quarter performance and the challenges Goods has posed over the past few years have clarified our path forward. Delivering on our growth strategy requires total focus on capturing the local experiences opportunity. Over time, Goods has become a less meaningful driver of engagement and an increasingly inefficient use of our impressions. It has effectively become a distraction, in which we can no longer compete and that we cannot afford, as it has taken roughly 40% of our impressions to deliver roughly 20% of our gross profit. This is the crux of our plan to exit Goods. Groupon is the largest multi-category local commerce platform in our markets and we are well-positioned to capitalize on the massive opportunity in local experiences. In 2019, we were a market leader and trusted brand, but with less than 1% market share. While the competitive landscape is fragmented, others are mobilizing against this opportunity, so we need to act now to extend our lead. To do this, we have to move quickly against a singular mission, winning in local experiences. We intend to put our power behind our four priorities: inventory, modernization, brand, and cost structure, in order to set the stage for Groupon's return to growth. Let me share some additional context about each of these. First, on inventory, we believe that increasing our inventory and, more specifically, elevating inventory quality and density in targeted core cities is mission critical. When merchant density is higher, we see an increase in purchase frequency as much as 15% to 20%. We also know from our partnership work that our customers want a more comprehensive catalog of experiences
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