Good day everyone, and welcome to Groupon’s fourth quarter and full year 2012 financial results conference call. [Operator instructions.] For opening remarks, I would like to turn the call over to the Senior Director of Investor Relations, Genny Konz. Please go ahead.

Thanks, Genny. Q4 provided the best evidence yet that customers love Groupons. First and foremost we had our strongest sequential increase in absolute billing dollars in our history, growing more than $300 million, stronger than our previous record by over $40 million, and growth reaccelerated to 25% quarter over quarter. The billings growth was across the board, with local travel and goods both in North America and international all seeing strong sequential increases. We also set a new unit sales record in Q4, exceeding 50 million sold for the first time. This is proof once again of the power of our buying platform and network that didn’t exist just a little over four years ago, and now supports over $5 billion of commerce. Executing on our belief that scale does matter in this business, our results reflect the deliberate and aggressive focus on growth of our platform and segment market share as well as our willingness to trade off short term operating profitability. We expect our operating margins to improve in 2013 as we fine tune our take rates and automate manual processes that will significantly improve our cost structure going forward. We’re also reiterating the long term operating margin targets that we’ve shared with you previously. Excluding stock based compensation and acquisition related expenses, our operating profit came in at $14 million in Q4. There were three main drivers of what we expect to be a temporary reduction of operating margins. First, Q4 is a seasonally strong quarter for our goods business. As we’ve discussed before, growth of goods, the direct portion of which carries lower margins, has impacted our overall margins as it has grown materially over the last few quarters, reaching an impressive $2 billion annual billings run rate in Q4. Second, we reduced local margins in…

Thanks, Andrew. Before I dig in, I just want to say a quick hello to those of you whom I haven’t met. As Andrew mentioned, today I want to talk about Groupon’s evolving cost structure. I’ll also provide a brief update on the turnaround of our international segment. When I arrived nine months ago, one of my top priorities was to turn innovation inward to automate and optimize many of our internal processes. Based on my experience at Walmart, Drugstore.com, Amazon.com, and GlobalScholar, I immediately saw in Groupon an amazing business that had [unintelligible] on hiring people very quickly. As a matter of fact, an incredible 10,000 people distributed across more than 500 markets in 48 countries in its first three years, in order to scale and grow its market leadership position. Also, I saw that Groupon was overflowing with opportunities to operate faster and more efficiently by automating the manual processes and improving the experience for our merchants and consumers. Bottom line, I saw the opportunity to do more with less, and sustainably improve our cost structure. I of course also saw a big challenge. Let me provide a few anecdotes that got me really excited about this opportunity. We had hundreds of people spending their days copying and pasting data from external systems into our customer relationship management system, and city managers doing their market planning on white boards and in Excel spreadsheets. And there was a common ratio when comparing our segments, that is 2:1. The number of individuals that touch a deal in international is more than twice that of North America, and the average sales rep in North America drives than 2x the sales than the representative in international. That is an enormous opportunity to augment Groupon’s operations to be both more efficient and get…

Thanks, Kal. With our detailed results available in this afternoon’s press release, I’m going to run through the highlights of our performance and then provide our outlook for the first quarter of 2013. Please note that all comparisons refer to year over year growth unless specifically stated otherwise. Despite some operational challenges, 2012 was a solid year for Groupon overall. Billings, or platform growth, of 35%, or 40% excluding foreign exchange, was about in line with our expectations at the time of the IPO a little over a year ago, and we reached operating profitability for the first time for a full year, with both the North America and international segments posting annual operating profits. Now let me turn to some highlights for Q4. Gross billings grew 25%, excluding FX. Again, this was the strongest sequential increase in absolute dollars that we’ve ever seen, as well as the strongest sequential percent growth we’ve seen in six quarters. Excluding FX, North America led the growth, up 52%, while international was up 9%. Revenues grew 31%, excluding FX, due to the growth of direct revenue, which is accounted for on a growth basis. Strong performance in North America was offset by declines in international. We reported an operating loss of $12.9 million in Q4, including $26.6 million to stock based compensation an acquisition-related expenses, and $16 million of depreciation and amortization, compared with an operating loss of $15 million in the fourth quarter of 2011. North America segment operating margin was 4.5%. International segment operating margin came in at negative 1.3%. The segments include an $8.5 million impact of an update to our intercompany headquarters allocation, which resulted in a one-time increase to North American opex and a corresponding decrease to international opex. We recorded a net loss for the quarter of…

We started Groupon in 2008 with a very simple value proposition: Every day we send you something great to do, see, eat, or buy, and make it available at 50-90% off. Since then, we’ve made dramatic improvements to that value proposition. Smart Deals makes our emails far more relevant. We’ve expanded into new categories, now with the infrastructure to procure not only local but also product and travel deals, adding freshness and variety to the Groupon experience and ensuring that Groupon never becomes boring for our customers. We’ve built a mobile experience that many people prefer to our web experience, as reflected in the massive shifts in usage patterns. And we’ve begun the process of moving beyond the in box with a searchable marketplace and inventory system that now accounts for about 50% of our local transaction volume in North America. These innovations helped us bring in a solid close to a great 2012 for Groupon: 35% growth in billings, 45% growth in revenue, 20% growth in units, 22% growth in active customers, our first full year of operating profitability, and a fourth quarter that, while operating margins have temporarily contracted, shows powerful signs of customer demand for what we’ve built. Despite their unpredictability at times, when we take a step back we’re quite proud of these numbers. 2013 will bring sharp focus to the customer and merchant experiences, which we believe is the healthiest and most durable way to grow our platform in the company. As we sit today, we remain better positioned than any company in the world to plug local commerce into the web. There are 60 million local merchants worldwide. 18 million of those merchants are in our core categories. Of these, we have contacted 2 million in our lifetime, and we have featured more than 500,000. So while we’re the largest player in mobile commerce, we’re just getting started. There is significant additional headroom for growth. And with that, I’ll turn it over to the operator for some questions.

[Operator instructions.] Our final question comes from Ross Sandler from Deutsche Bank.

Jason, you said just a second ago that CSOI will be up in 2012. Can you also just help us with, from a planning perspective, what kind of billings growth and gross profit growth would need to be achieved to hit that goal? And then the second question is capex was up to about $40 million in the fourth quarter. That was above prior run rate. Was there additional capitalized software in there? And what do you think the cash flow run rate will look like going forward?

In terms of giving long term guidance beyond operating income, it’s just not something that I’m going to be able to provide at this point. What I can say is we do expect that the profit will come from the combination of both growth as well as improvements in operating leverage through tightening our cost structure, as we’re continuing to roll out automation, specifically in our international markets. In terms of the question about capex, you’re right, the largest increase was because of capitalized software, and much of that has to do with the efforts that you’ve seen. We talked just a moment ago about the efforts with the pull business, where we’ve done a lot of work from a technology perspective, and those costs were capitalized and now you’re starting to see the amortization increase with those efforts. And then I think there was also some additional costs that come from increasing storage capacity and data centers. And then I’d say the last thing is finalizing the implementation of our international headquarters in Switzerland, which went live at the end of Q4, was another piece of the buildout. In terms of cash flow guidance going forward, we’re not providing specific guidance. I would say you should continue to think about cash flow trending similarly with CSOI, or operating income less stock based compensation, and with any increase in capex offset largely by working capital.

Our next question comes from Justin Post from Merrill Lynch.

First, can you talk a little bit about the goods margins? Obviously 3% in the quarter. And I saw your long term outlook slide, it’s much higher. How do you get there, and what kind of sourcing do you need to do to kind of get those higher? And then for the guidance for the first quarter, I guess it’s suggesting that the third-party business is up sequentially? Is that what’s going to really help profitability in the first quarter?

First, on the direct margins, let me kind of break that apart. We had a 6% direct margin in North America. And that is down from last quarter, when it was roughly 13%. The reason that you saw a reduction was primarily due to the goods business, where from a seasonal perspective we had a higher mix of lower margin product, very much related to the seasonal push on the types of products we wanted to sell and that customers clearly had shown indication to buy. But then also we implemented a free shipping program as well. And so those were the key aspects. I think you should still expect that our long term operating margin we think is still expected to be in the high single digits. One thing I want to make sure is clear is when you look at that 6% North America, make sure that when you’re comparing that to any other ecommerce companies, this does include shipping, it includes all fulfillment costs, inventory costs, even processing, email distribution costs. It includes basically everything but an allocation of the direct headcount costs to run a team as well as the marketing allocation. So there’s not a lot below that line to get to operating income. Now, the other piece was the international, which was actually negative. Now, the international direct portion is very small. It was only about $15 million, and it was negative because of basically some strategic deals that we sold below cost, having a couple of seasonally strong offerings in some of the newer markets where goods is still a very early stage business. Can you remind me what the guidance question was? It was mix?

Yeah, it looks like you’re expecting the third-party business to maybe improve sequentially to help overall operating margins. Is that right? And what kind of growth are you hoping for in the third-party business in Q1 versus Q4?

That’s exactly right. We are expecting that you will see solid growth in the third-party business, and we would expect it to accelerate from what we saw in Q4. And that’s a less-seasonal business for us. That will be offset by a bigger reduction in the goods business, which now that it’s a $2 billion run rate, seasonality is now becoming a factor given we’re at that scale. As a result, when you see the reduction in the lower margin goods business offset by the acceleration in the higher margin third-party business, that’s why we expect to see improved operating leverage in Q1 versus Q4.

Our next question comes from Heath Terry from Goldman Sachs.

One question, first, for Kal. As you look at Groupon’s geographic footprint relative to the cost initiatives that you’ve got in the year ahead, how do you think about the footprint that Groupon carries versus the prior ecommerce businesses that you’ve been around? And then Jason, having gone through the process of resolving the material weaknesses, could you give us a sense, to the extent they were one-time costs in 2012 involved in resolving those weaknesses, to what degree we shouldn’t expect to see those in 2013? And then now that you’ve got those resolved, what you feel like you’re going to be able to do either from a disclosure or management standpoint that you weren’t able to do before?

That is an excellent question. Groupon, we are doing something which is unprecedented in the world. We are not building a company, we are building a category. And simultaneously, we are building it all over the world. And it really poses a huge issue on executive bandwidth if you don’t have the processes and controls alike everywhere. And one of the biggest initiatives we have for this year is about getting the processes and efficiencies which we call as “One Playbook.” We are fully focused on rolling them out worldwide, and as we get there, I think the executive bandwidth we would need to exploit the [unintelligible] opportunity would be a lot less than what it has been in the last two years. But simultaneously, we are continuing to evaluate not just countries, we are continuing to evaluate every single market, every single city we are in, and to make sure that we are able to take care of the merchants and customers, more importantly our shareholders, by operating in each one of them. So this is an evolving question. This is a question we continue to ask ourselves every week, every month, every quarter, and we believe we are in the right place right now. But as we roll out our One Playbook in 2013, we’ll continue to evaluate it again and again to make sure that we build the best value for our merchants, customers, and shareholders.

And Heath, on your second question, about the material weakness, I guess there’s two things going on this year. One, we were working on remediating the material weakness, but we were also implementing Sarbanes Oxley, or SOX, as it’s our first full year as a public company. And so I would say we feel great about the progress we’ve made. In terms of how that’s going to affect things going forward, I would say one, from a cost perspective, a lot of the costs you saw had more to do with implementing Sarbanes Oxley across 48 countries, as opposed to the material weakness was really specifically around the financial statement close process. So it was really around a very small portion of the overall Sarbanes Oxley efforts. So I think the impacts are, you could see some reduced SG&A cost as a result of that effort that was mostly a 2012 effort, and then that also allows the audit process to be a little less intense as they now, the auditors, can rely on the integrity of the financial statement close process and have to do less auditing as a result. In terms of disclosure, it shouldn’t impact the disclosure at all, actually, going forward.

Our next question comes from Shawn Milne at Janney.

Just wanted to see if we could get a little bit more color on the North American take rates, just in the third-party business. You mentioned that you tested some things and you were trying different take rates during the quarter. I think in the prior calls you had said those had been pretty steady. I just wanted to understand the thought process around that, and how we should think about that going forward?

What you see in the fourth quarter in North America and the local business is investments in our strategy to increase selection on our platform. Again, we’ve increased our active deal counts in North America by over 300% in the last year, because we think it delivers a more relevant experience for consumers, and is in pursuit of our searchable marketplace strategy, where customers can come and find deals on demand and not just have them emailed to them. So part of that strategy is ensuring that we bring in new high quality merchants and that all of our merchants are comfortable having inventory available in a persistent manner on our marketplace. And the results are why we’re seeing such strong numbers in the local business, in terms of unit growth and overall demand billings growth in the fourth quarter, and through our guidance expecting that to accelerate even further into Q1. In the fourth quarter, because of some of these changes, we have added more merchants to our platform than I believe any quarter in history. And on top of that, in the fourth quarter the merchants that we signed, 84% of them are in our deal bank inventory, and still running deals today in our marketplace.

And Shawn, one last point. We have given a long term guidance of local take rates to be at the high end of 30-40%, and as a result of these exercises, we are very comfortable with the long term guidance we have given on the local take rate in the 30-40% range.

Our next question comes from Arvind Bhatia with Sterne Agee.

I wanted to see what your thoughts are on, as we move more toward search marketing, one was the impact on the cost, and also, how does that impact a customer’s sense of urgency in buying the local deal, knowing that the deal might not always be there in your deal vault, if you will? Do you sense that a customer then, therefore, delays the purchase decision as a result?

I’ll start with the latter, and then I’ll let Jason take your question about cost. When we started this business in the first months of 2008, that sense of urgency of the deal being available for 24 hours might have played a role in people’s purchase decision, but all the research that we’ve done that has informed this strategy has taught us that through the proliferation of competitors and the availability of multiple deals through many different sources, as the space took off, that became less of an influencing factor in people’s purchasing decision. The reason that people buy Groupons is not some game mechanics. It’s because of the real value that these offers provide. We just believe that the potential of a local marketplace business, where you can fulfill demand instead of shocking people into buying something they had no intention to buy when they woke up in the morning, which we built a great business on top of, and only making it available for 24 hours, it’s just a much larger business opportunity. And the numbers, which I just articulated as part of the prior question, reflect that.

Can you restate the question on cost?

You were going to try to pull people over to your website, show up more in search engine marketing type situations. What is the cost of that to your marketing?

I would think of that cost as being baked into our marketing targets. What you’re talking about is more transactional marketing as opposed to what we’ve been doing a lot in the past, which is subscription or marketing to try to drive someone to sign up on the list as opposed to being driven to the site to purchase. But in terms of the overall dollars spent in marketing, we allocate those dollars based on whatever the next-highest ROI is, or the incremental ROI. And the current infrastructure that we have around driving more SEM, I would say, is still relatively small, and it’s mainly been constrained by the size of the overall inventory of deals. In other words, the more deal inventory you have, the more terms that you can buy. And then therefore the more likely potential SEM revenue you can purchase. So as we increased the total inventory from a little less than 10,000 deals a year ago, now up to around 37,000, we’re going to hopefully start to continue to increase that capability. In terms of the overall spend rates, we’ve told people historically that we expect to spend roughly 20% of revenue on a third-party basis on marketing, and more like 8% on a direct basis. And 8% and 20%, by the way, on a billing basis, they’re both about 8. So the difference is the take rate assumption. So we expect to still stay within those guidelines. Obviously we’ve spent a lot less in this most recent quarter, and so as we see the ability to drive more marketing spend to drive growth, we will plan on doing that.

One clarification. The comment you guys made about operating income growth in ’13 versus ’12, based on your first quarter guidance, it implies that you’re looking for significant acceleration in the quarters after the first quarter. Is that mainly as a result of better take rates? Or is there more to it? I would say there’s a couple of things. There’s the combination of increasing growth in the local business, specifically, which is the highest margin business we have. You’re going to see that business accelerate into Q1. And then the lower margin goods business, specifically the direct portion, will decelerate, as I mentioned earlier, because of the seasonality, the seasonal effect of coming off Q4 going into Q1. So that’s going to help in Q1, but going forward, we expect that because of the things we’ve talked about with mobile and with pull, you’re going to continue to see the local business continue to grow. So there will be overall growth that helps. There is some aspect of stabilizing take rates in the local business, where in Q4 we adjusted down a bit more than we did at the end of the quarter. And so as we’ve been fluxing and kind of trying to learn the elasticity on the revenue margin or take rate, we are confident that as we exited the quarter, it was the higher take rate that will allow us to have higher take rates overall in the local business, and within third-party, in Q1 versus what you saw in Q4. The last piece is Kal talked a little bit about how as we increased automation, you’re also going to see us reduce our cost structure. I also mentioned, I think, a few minutes earlier, to Heath Terry’s question, we’re also going to have less public company costs as we’re now past the soft compliance and material weakness remediation, so there will be some improvements in cost structure as a percentage of revenue as well.

Our next question comes from Jordan Rohan from Stifel.

I had a question for Kal. I’m wondering how you make sense of being in 500 different markets in 48 different countries. Clearly profitability would have to be higher if the bottom 10% or 20% of those markets were exited. How do you think about when those markets turn profitable, and whether you guys have gone a little bit too far to manage something on a long term profitability basis. And secondly, marketing is down a ton. I think it’s 60% year on year. But you guys still came in a little bit shy of profit expectations or significantly shy. How does this trend reverse? What’s going to make that happen?

I think that’s a fantastic question. So, 500 markets, 48 countries. We did grow way too fast with way too many people. Because we wanted to gain market segment share. And we do have significant market segment share in most of the countries. We are on a constant exercise, on a regular basis, to make sure that at a country level, at an every single market level, do we have the right variable cost which would justify the right leverage or the top line on leverage. And we are going through that exercise as a part of the One Playbook for our international markets. And we will continue to flex it in a way that we are there to take care of the merchants and the customers and our shareholders in the right way. And it will be an evolving process. Like I said, international is a turnaround, and we are very happy with the progress, but by no stretch of the imagination is it done in one quarter, or it will be done in one quarter. But the progress we have made in the latest quarter, the acceleration in billings, which is the highest in the last five quarters, the productivity has been the highest, and we accomplished that while taking care of our merchants and customers. Because our merchant satisfaction, customer satisfaction scores have been the highest ever too. It gives me lots of confidence that we can not only grow, we can grow in a fiscally responsible way and [unintelligible] to shareholders. On the marketing question, I am going to ask Andrew to jump in and answer with me on that.

What you saw in the fourth quarter was the result of our recognition that there’s a few different ways we can drive growth in this business. We can invest in marketing. That’s one way. Another lever that we have is passing savings back to our merchant and customers through passing savings along to merchants, bringing higher quality merchants onto the platform that attract more customers. That is a reflection of our strategy to become a marketplace with a wide selection of deals. And we’ve seen the results pay off in having a record quarter in terms of unit and billings growth, with some of the strongest sequential growth that we’ve ever seen. So we’re expecting to use these two levers to continue to grow billings and revenues into 2013.

Our next question comes from Brian Pitz - Jefferies & Company: You discussed direct revenue growth earlier. Any additional color on key drivers of direct revenue growth in each region internationally? And also, I may have missed it, but any update on average customer acquisition cost and LTV?

On the direct revenue growth, we said that we hit about a $2 billion run rate in the goods business overall, and so roughly $500 million for Q4. The direct revenue was roughly $225 million globally, and then within that, a little less than $15 million of it was in the international business. The remainder was in North America. Does that answer your question? Brian Pitz - Jefferies & Company : The question was more of the color on drivers of that international growth.

The international growth, it was very small. It’s only 15%. And the reason why it’s very small is because we have not implemented all the same processes and the network around third-party logistic partnerships, like we have in the U.S., where we have kind of a group of preferred partners, which allows us to take ownership of inventory and kind of handle the full customer experience. As we expand those relationships internationally, you should expect to see that number grow from the $15 million, which was up just slightly from where it was in the previous quarter. But that’s going to be later in 2013. Brian Pitz - Jefferies & Company : And any updates on customer acquisition costs and lifetime value?

In terms of the acquisition costs, if you use the marketing numbers on the face of the financials and the customer growth, you could extrapolate that. It was down around over 50% year on year. I’m sorry, we put it in the earnings release that it was actually down 61% year on year.

Our next question comes from Rohit Kulkarni from Citi.

On mobile [unintelligible] business in North America, coming from there, any additional commentary you can talk about, customer acquired through mobile, how valuable they are, do they spend more versus other customers acquired through other channels? And second, any additional color that you can give on Groupon now in Getaway?

I will take the questions on Now and mobile, and then pass it over to Kal for Getaways. Mobile users, as we’ve said in the past, are better customers for Groupon than non-mobile customers. The data is very clear. They have a higher lifetime value, retention is higher of these customers. So the transition to mobile is a very good thing for Groupon. We’ve also seen it as a core component of our strategy to move from push email marketing to pull marketplace marketing. And the massive shift in consumer behavior towards mobile is one of the clearest signs that we see that our strategy is working and resonating with customers. Groupon Now, what you’re seeing with our search marketplace strategy is the evolution of Groupon Now, and we see innumerable signs that it’s resonating with customers. Now, over 50% of transactions in our local North American business are not from deals that launched in a given day, but from deals in our deal bank virtual inventory system. So the investments that we’ve been making in selection are paying off. We’ve also seen a large increase in the percentage of transactions that are customers seeking out Groupon, going direct to Groupon, and not being driven through a push email. Kal, do you want to talk about Getaways?

Yes. Getaways is a fantastic segment for Groupon, and the business is fairly new. It’s been around for a little over a year. And our customers have been trained extremely well to look for curated deals with unbeatable value and we shock them into buying things they never thought when they wake up in the morning. And travel is actually the best way to shock people into taking a vacation, buying the deals they want to buy. And that business, we expect that to be a meaningful percentage of our business in the long run, but it is going to aid our third-party business in a very positive way. And we are very happy with the progress we are making. It is too early to declare victory, too early to report numbers on that as we talk.

And our final question for today comes from Tom White from Macquarie.

On the local deal margins, it seems like in the fourth quarter you guys made some concessions there to bring people more merchants, or higher quality merchants, onto the platform. Where are we kind of in that process internationally? Do you guys feel like you’ve balanced the members versus merchant experience there, or do we still have a few innings to go of balancing that out? And then just secondly, on goods, I was wondering if you guys were starting to see any signs of maybe trouble procuring discounted inventory from manufacturers and retailers as the macro seems to stabilize? How should we sort of think about that as the macro continues to kind of stabilize or trend up over the course of this year?

Let me first clarify on local margins in North America, then I’ll let Kal talk about how we’re doing internationally. In North America, one interesting thing to keep in mind that’s different between Groupon from most ecommerce businesses, is for a typical ecommerce business, 90% of your transactions are related to deals that you’ve struck with a supplier in prior quarters, out of period. The strange thing about Groupon is we’re always out there closing new deals, and the majority of our sales are coming from deals that we are closing in a relatively short timeframe. So as a result, as we make strategic shifts, one of the luxuries of our business is we can move margins around very quickly, and experiment with different ways to drive growth. So that’s why you see some of the movements, and we actually expect those local margins, just through what we saw in the back half of the fourth quarter and what we’re seeing in Q1. Those local margins in North America will go back up. In other words, even there, we are constantly learning and evolving and perfecting our approach. Do you want to talk about international?

Thanks, Andrew. Like Andrew said, we can test and flex supply elasticity faster than many other ecommerce players. We were flexing and testing it with the only aim of attracting high quality merchants onto our platform. We did that in the United States. We did that in our international markets. As we emerged through the test in Q4, you could say we have kind of arrived at an optimal point which we believe remains very much in the range we gave to you a long time back, about the top half of 30-40%. And that’s where we’ll end up in both the United States and international. On the second question, on any trouble in accessing inventory from vendors in goods, actually we have absolutely no trouble. As a matter of fact, the vendor community likes us for multiple reasons. One is that we could we be their testing bed for launching new products. We could be their fastest way to push inventory on an end of life cycle product, and we could also be the fastest way to increase their inventory turns. So we could play with the vendors at the beginning of a product life cycle, while the product is in vogue, after the end of the product life, so the life cycle. And our issue is not getting access to the vendors, our issue is making sure that we curate deals in such a way that we can continue to delight our customers with our value proposition of freshness and high value for them.

And this concludes our conference call for today. Ladies and gentlemen, thank you for participating.