Good day, everyone, and welcome to Groupon’s Third Quarter 2014 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 VP of FP&A and Investor Relations, Genny Konz. Please go ahead.

Hello, and welcome to our third quarter 2014 financial results conference call. On the call today are Eric Lefkofsky, CEO; and Jason Child, CFO. The following discussion and responses to your questions reflect management’s views as of today, October 30, 2014 only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today’s press release and in our filings with the SEC, including our Form 10-Q. We encourage investors to use our Investor Relations website as a way of easily finding information about the company. Groupon promptly makes available on this website, free of charge, the reports that the company files or furnishes with the SEC, corporate governance information, and select press releases and social media postings. Our results for the third quarter reflect the acquisitions of TMON and Ideeli since their respective dates of close in January. We will at times, discuss performance, including and excluding the impact of these acquisitions for comparison purposes. Additional detail regarding the contribution of each to the quarter will be included in our 10-Q. On the call today, we will also discuss the following non-GAAP financial measures: adjusted EBITDA, non-GAAP earnings per share and free cash flow, as well as 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 non-GAAP measures, including reconciliations of these measures with U.S. GAAP. Unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2013. Finally as a remainder, we are hosting our first Investor and Analyst Day in Chicago on November 11. Live webcast of the event will be made available through our Investor Relations website. And now, I will turn the call over to Eric.

Thanks Genny. Q3 was a record quarter, and one in which we largely delivered on all of our main operating objectives for the year. After three quarters of stagnant growth, our North American local billings accelerated from 1.8% last quarter to 10% in Q3. Our goods gross margins in North America improved sequentially to about 10%. And in rest of world, we reduced our segment operating loss by more than half sequentially, and generated positive adjusted EBITDA for the first quarter in over a year. We were able to reignite growth across all our segments in Q3, which drove a 39% increase in our overall gross billings to $1.86 billion, with revenue increasing 27% to $757 million. Adjusted EBITDA continue to increase coming in at $67 million, and non-GAAP EPS came in above our range of $0.03. North American performance was strong. Gross billings grew 16% to $774 million, driven by double-digit growth in all three categories; local, goods and getaways, a tri-effect that hasn’t occurred in over a year. North American revenues increased 16% to $480 million. Gross profit was $176 million. And segment operating income was $13 million. These are strong results despite a tough prior year comp in local growth and given the Q3 is typically seasonally low point for local as people travel throughout the summer months. EMEA billings growth accelerated from under 1% last quarter to over 10% in Q3, reaching $489 million, also driven by growth in all categories. Revenue growth was 56% compared with 42% last quarter, reflecting a greater mix of direct revenue. In addition, we generated $22 million in segment operating income. After much work, EMEA has now seen three quarters in a row of year-over-year customer growth, and we believe it remains positioned well for the future. Rest of world…

Thanks Eric. With the details available in this afternoon’s press release, I’m going to run through the highlights of our performance and then provide our outlook. Note that all comparisons, unless otherwise stated, refer to year-over-year growth. Here are the highlights. Gross billings increased 39% to $1.86 billion. North America grew 16%, EMEA increased 10% and rest of world increased to 155%. Excluding TMON and FX, and further taking the exit of Groupon’s legacy Korea business into consideration, we were pleased to see rest of world’s growth for the third quarter in a row increasing 9%. Revenue increased 27% to $757 million. North America grew 16%, EMEA grew 56%, and rest of world grew 26%, lower than the 155% billings growth as a result of the substantial addition of lower margin TMON billings to the mix. Gross profit was $380 million in the quarter, compared to $360 million last year. Gross profit growth lagged billings growth, due to a greater mix of direct revenues, as well as the addition of lower margin TMON billings. North America in particular, was also impacted by continued investments in quality, as well as the order discounts to drive awareness of our pull marketplace. The sequential decline in gross profit is consistent with the seasonal patterns that we’ve seen in the past. Adjusted EBITDA was $67 million in the quarter, up slightly compared to $62 million last year, as higher gross profit was partially offset by increases in SG&A and marketing related to TMON and Ideeli. Note that including order discounts to driver awareness of pull, which are reported as a reduction to billings rather than as a marketing expenses, we saw a $23 million increase in marketing compared to last year. GAAP loss per share was $0.03. Excluding stock compensation, amortization of acquired intangible…

Thanks Jason. As more and more commerce is occurring on the fly, the intersection of local and mobile becomes ground zero for the very evolution of commerce, with local being one of the last great white spaces of the internet and the largest sector of our global economy, disruption is inevitable. We are pioneering that disruption. Imagine millions of merchants connected to hundreds of millions of customers through a geo-centric commerce network. Imagine that as these customers move around, their commerce world moves with them, the options of what they can buy and should buy are being sorted in real-time, based on their location, their current preferences, what they just bought, time and day, inventory that’s just become available and so on. This is the platform we’re building at Groupon. And we look forward to providing more insight at our upcoming Investor Day. With that, let’s take some questions.

Thank you. (Operator Instructions) And our first question comes from the line of Ross Sandler of Deutsche Bank. Your line is open. Please go ahead. Ross Sandler – Deutsche Bank: Thanks guys. I had two questions. Nice job on getting the growth going here. So on that front, it seems like billings growth rates are accelerating pretty much across the board. In some markets, you’re seeing take rates come down. And Jason, you just mentioned some quality initiatives and how local is going to be kind of range bound. But we look at like 2015, 2016, do you firmly believe that with accelerating growth rates on billings, you can also see gross profit grow in tandem with that? And then the second question is on Groupon Pages. So Eric I think you mentioned 7% of your convergence come from SEO-driven activity. Can you just give us an update? It’s only been out for a short period of time, but what is Groupon Pages doing to increase that 7%? And I guess what percent of small businesses that have one of these new pages of claim their page for active Groupons with you guys in the past? Thanks.

Yes. Thanks Ross. So I’ll start. First of all, I think we’re excited that we were able to accelerate our growth in local from 1.8% last quarter to 10% this quarter. And obviously doing that in the phase of some significant headwind that we’ve seen over the past three quarters, where that local growth rate has been around 1% to 2% and we’ve talked a lot about what drove that in the past, predominantly headwind related to email and headwinds related to redemptions. But that has started to obviously stabilize and we’re coming out of that period and encourage that a lot of negativity is behind us. To me the first thing you have to do is get the local business growing again. You got to get billings growing. And if billings are growing and growing in a healthy way, it should translate into gross profit dollar growth. Since I’ve said before, I care a lot more about gross profit dollar growth than I do about percentages. I’d much rather have a local business that’s 2x or 3x as big as I think 35% margin as opposed to one that’s roughly the same size we have today at 38% margins. It’s not about percentages. The local business is so healthy. It’s really about reigniting growth. And we would expect to see now that we’re kind of through that period of negativity, we would expect to see that over time we make the kind of progress we want to make, both, in terms of billings growth and in terms of gross profit dollar growth as we work our way toward that ultimate goal of getting to 20% growth of both. And I’ll let Jason comment to the second, but before I do, I want to just knock out your question on…

So Ross, on your question regarding kind of expectations in the flow-through in take rates on revenue and gross profit. I’d say, the first thing is as the take rate in Q3 of last year in local, that was the highest we saw all of last year. So that of course from a comp perspective made a little bit tough from a revenue growth standpoint in local. And you still see that change a bit next quarter when – last year, we had 320 basis points reduction in local take rates from Q3 to Q4. We do not expect to see anywhere near that kind of reduction from Q3 to Q4 this year. So we’re probably more like 100 basis points or so. And then going forward into ‘15, Eric did provide in his prepared remarks the long range target of 20% plus for all the categories, all regions going forward over the next five years. I would expect us to make progress against that goal next year in terms of exactly let the growth rates will be across billings, revenue gross profit. We’re going to get into that a little bit more at our Analyst Day in a couple of weeks, and so we look forward to sharing with you that. Ross Sandler – Deutsche Bank: Great. Thanks guys.

Thank you. Our next question comes from Mark Mahaney of RBC Capital. Your line is open. Please go ahead. Brian Peak – RBC Capital Markets: Hi guys, Brian on for Mark. I was wondering if we could talk about local billings growth outside of North America, especially you’ve been deploying some of your North America technology abroad, specifically in Europe I believe, as part of the One Playbook. And then also, could you just remind us when you largely lapse the push to pull headwinds?

Yes. So first in terms of local growth rates outside North America, one of the great stories of this quarter is obviously the performance in Europe. Not only did Europe in the aggregate accelerate just under 1% growth last quarter to 10% growth across all categories, but in local, we went from negative 6% decline last quarter to 5% growth this quarter. So while Europe is not yet at the 10% level that North America is at, it certainly moved meaningfully in the right direction last quarter. And that has to do with the fundamentals that business being really significantly improved over the past year in terms of customer satisfaction and merchant satisfaction and deals that are really resonating, that team has done that. And we now will turn our attention and focus to rest of world and try to make sure that all the stuff we’ve done with One Playbook is making its way into rest of the world, which predominantly is made up of Asia and Latin America. And in terms of – your second question was related to headwind? Brian Peak – RBC Capital Markets: The transition from push to pull, especially at some of the unused deals also started to bottom-up North America, when do you think will lapse some of those headwinds?

Yes. So the headwinds began to show up in Q3 of last year, towards the end of Q3. And really it was related to the marketplace starting to take hold, people could all of a sudden in mass searched on Groupon and find amazing deals without having to buy them upfront. In the emails, we were historically pushing to them as a result, the number one used Groupons began to drop and redemptions went up. And we really started to see the impacts that our email business was really suffering because of that. A lot of that was being made up for parts of our business that were growing both rapidly, like our mobile business, but it was just up slightly more than offsetting the negative headwinds, that’s why we were delivering kind of 1% or 2% growth. What’s interesting about Q3 of last year is that, actually in Q3 of 2013, it was actually our biggest period of local growth. I think we grew about 13% in Q3 of last year. I think it was like 4%, 5% or 6% in Q1. Then like 8% or 9% and up to 13%. And then it dropped pretty dramatically to like 1.8% in Q4. So to deliver 10% growth in Q3 of this year, we’re actually lapping a period of pretty significant growth. This isn’t an easy comp for us. If the comp gets easier, it gets easier in Q4 after the headwind began to show up. So hopefully that answers your question. Brian Peak – RBC Capital Markets: Great. Thank you very much.

Thank you. Our next question comes from the line of Paul Bieber of Bank of America Merrill Lynch. Your line is open. Please go ahead. Paul Bieber – Bank of America Merrill Lynch: Hi guys, thanks for taking my questions. I was hoping that you could give us some commentary just on the quarter-over-quarter growth in active customers. It looks U.S. and Europe was pretty healthy, but the rest of world declined. Can you give us some color on the decline there, given the strong bookings numbers? And then secondly on exploring the sale of Ticket Monster. It’s been a relatively short time since you acquired that. Can you give us some color on the whole processor?

This is Jason. I’ll take the first question. So on the customers, it relates to absolutely bought TMON in Q1. In Q2, we’ve shutdown the Groupon Korea operations, since TMON became the new operation for us in Korea. And so we then removed those customers towards the end of Q2 last year. And so as a result – I’m sorry, actually this year. And so as a result, it shows that the customer account decreased, when if you take Korea out of it, it actually increased in fairly health trends just like the other regions.

And as it relates to Ticket Monster. So one of our main objectives obviously was to reduce our losses in rest of world, but another is to stay focused and to make sure that we win in our biggest and most important business, which is local. Right now, we’re in 47 countries and we can’t invest in every country at the level that we would like to at all time. It’s just not possible. And some markets like Korea are evolving really rapidly. TMON is growing faster than we thought. It would have certainly growing faster than it was when we acquired it. The growth has really been unbelievable and that business is thriving. And it has the potential to be the leader in e-commerce in Korea and we’re very focused on the long-term. We’re focused on making that happen. And one of the things that we’re going to do is explore strategic alternatives that could – because we believe that TMON there is – and there could be other markets that are similar could really benefit from having a strategic or financial partner that helps them unlock their ultimate value. We’re not looking to sell all of TMON. We love the business and you – obviously you can never tell where these things go, but we’d like to be shareholder for a long time, but we need to set that business up for success. And again, we just can’t be as aggressive as we’d like to be in 47 markets at one time. And the opportunity in TMON and some other emerging markets in APAC is really getting interesting and we want to take advantage of. Paul Bieber – Bank of America Merrill Lynch: Okay, thank you.

Thank you. Our next question comes from the line of Arvind Bhatia of Sterne Agee. Your line is open. Please go ahead. Arvind Bhatia – Sterne Agee: Thank you. And I’d like to add my congratulations on achieving your targets in the quarter earlier than expected. I wanted to go back to a question that I think Ross was asking about, your 2015 and 2016 plans. As you think about local billings in North America and elsewhere, turning ago from 10% to 20% long-term. Can you provide some thoughts on in the interim ‘15 and ‘16, how much progress you expect in those years, similarly for gross profits as well? And then my second question is on Groupon Pages. As you invest against that business, do you also have plans to maybe incorporate some sort of advertising models into that? Do you think that, that would be a possibility for you down the road? Thank you.

Arvind, this is Jason. I’ll take the first one. Thanks for the question. So I mean the short version is, we do expect to make progress in ‘15 and ‘16 and kind of how we expect to do that. I’m just not going to be able to get into it now, but I hope you’ll be able to join the Investor Day in a couple of weeks and we’ll get into it then.

And in terms of pages. So if you think about this product and where it is, we have built over seven million pages, but we’ve only released roughly 500,000 or more, both to our internal search index at Groupon and then to the external search indexes like Google. And that’s a matter of time, right, because these pages have to have rich content. You can’t just dump seven million pages in the market. You have to make sure the pages have rich content. And so we’ve just begun taking action to help facilitate the collection of tips and pictures and reviews and ratings and all that good stuff that makes the pages excited. As these pages get built, we’re fortunate that Groupon is first and foremost in the transaction business. And so we want to put up some kind of deal or special offer on these pages. We have a lot of inventory already that we can pull from and put on those pages and we’re not working with our merchant partners for them build pages to say, hey, is there any specials or offers or deals that you want to put up to help attract customers. Again, when you have a community of traffic as large as ours over 150 million monthly unique, and all these people that have credit cards on file and are actively repurchasing, we think we can become an amazing channel for merchants to get customers in the dorm. Just one anecdotal point is we launched the feature a few months ago called request-a-deal. And we’ve just been blown away. Over 400,000 people have clicked that button letting merchants know that should they ever decide to run a deal, they would love to buy it. And this is only 45 or 60 days old or whenever we launched it. So it’s very new. So the engagement has just been fantastic. And right now we’re first and foremost focused on getting that engagement up. We monetize things for living, and so we’ll have no problem monetize these pages. Arvind Bhatia – Sterne Agee: Okay, great. Thank you guys.

Thank you. Our next question comes from the line of Eric Sheridan of UBS. Your line is open. Please go ahead. Trim Chiodo – UBS: Hi, Tim Chiodo in for Eric. Question is mainly on the EMEA direct business. So specifically last year around Q4, you started I believe partnering with third-party fulfillment partners, and you really saw an uptick in that business and its continued strength for the last few quarters. Just wanted to see if there were any plans to bring on additional partners or to build out the fulfillment capacity in the region further for 2015?

This is Jason. I’ll take that question. So we did see a really nice improvement in direct margin last year. As you said, we actually grew from about 10% to 14% direct margin in EMEA last Q3 to Q4. This year, we actually just completed Q3 at about 18%. It is – there are some 3PLs or third-party logistics kind of outsources that we use. We use a larger percentage of drop-shippers. You have to remember that in Europe, it’s very different than North America. We have much smaller geographic areas that we’re covering. And so as a result, we can actually provide a great customer experience in terms of a relatively short quarter to delivery timeframe. And per unit economics are not as sensitive there as they are in the U.S. We’re getting two versus one units in a box really makes a big cost differential in the U.S., not as much so in EMEA. So you should expect to see that business continue to run the direct margin was 18%. Overall it’s about 17%. You should expect it to stay in that territory. And because there is a lot of capacity for drop-ship and 3PL, we don’t have any near-term expectations that we need to do any sort of kind of fulfillment center build out, but that certainly could be an opportunity I’d say farther down the line, but again that’s not something that we’re focusing on right now [ph]. Trim Chiodo – UBS: Okay. Thanks very much.

Thank you. Our next question comes from the line of Ralph Schackart of William Blair. Your line is open, please go ahead. Ralph Schackart – William Blair: Good afternoon. On the good side of the business again. As you made a lot of significant amount of logistical changes since last year, how are you thinking about the upcoming holiday seasonal demand in 2014? Your ability and capacity to handle that demand versus where the goods infrastructure was last year? Thanks.

Yes. So I’ll start and Jason may want to also comment, but look, we’ve done a significant amount over the past year to prepare for this holiday season, and we think we’re in a very good shape. We opened up our Kentucky distribution center in Q4 of last year. And so it’s just starting to ramp-up. Obviously it’s been opened now for a year and we feel great about the throughput of that facility. We’ve done a ton of work on the systems side to make sure that our logistical infrastructure and systems are ready. As you can see from the site itself, we’ve done a lot of work in terms of the user experience that people are seeing when they come to goods and search. We’ve got a new UI. There is a new UI in mobile that’s being rolled out. We’ve added a significant amount of inventory that’s now thousands of deals on the site. So we think we’re well positioned from a demand perspective and from a systems perspective going into this holiday season.

Yes, Ralph, the only thing I would add is, last year we did have a couple of hundred basis points of margin reduction that happened in the quarter because of the combination of refunds and upgraded shipments, because we just didn’t have a great handle on the intersection of what our demand versus what our supply capacity actually was. And so that is something that we have a much better, I think team, as well as process and set of tools to monitor. And so the result I would expect, I think last year between Q3 to Q4, we saw over a couple of hundred basis point degradation, I’d say 300-plus – 370 basis point degradation in gross margin. We expect to see – there could be some – a little bit of reduction that has more to do probably with pricing and margins, but in terms of the actual net gross margin reduction, it should be very small, certainly relative to last year. Ralph Schackart – William Blair: Great. Thank you.

Thank you. Our next question comes from the line of Brian Fitzgerald of Jefferies. Your line is open. Please go ahead. Brian Fitzgerald – Jefferies & Co: Thanks guys. You’ve had Groupon Freebies for a while longer than Snap with the cash back offers. Can you differentiate around the levels of interest in both of these? Is there any difference in the type of merchants participating in each one? And maybe as a follow-up. How is the in-store uses of Freebies tracking to-date? Thanks.

Yes. So I would say in terms of Freebies and Snap, even though Freebies is older than Snap, both are still fairly new business lines for us. Snap, we launched – obviously it’s very new. It’s only a few months old and we’ve just been overwhelmed at the adoption of that app. There were about a million people downloaded the app in the last 45 or 60 days and it’s just been kind of a runaway hit. And I think one of the reasons is that it serves a different kind of merchant profile than Freebies. Freebies is really in the business of dealing with all the big retailers and brands and gets at kind of the main stay of commerce, right. Its big national retailers, people that have an online presence, people have in-store presence. And it’s all the coupons that they tend to offer, similar to a RetainMeNot or Coupons.com and people like that, whereas Snap is really much more whenever they household – kind of a CPG product. It’s all about helping people save money on, the everyday things that they buy in a grocery store, loafs of bread and milk and eggs and macaroni cheese and all that good stuff. And so those big consumer brands have just adopted and have really fallen in love with it. It is a tool to reach a new consumer and get people to try new items, right. It’s a very big deal. You can get people to try a new brand of soda or a new brand of a household item. You can build long-term loyal adoption. And Snap is a tool to do that. So the level of interest has been super high. They serve slightly different consumers as I mentioned. In terms of the in-store usage. Basically right now, the Freebies business – we make money the same way as the other companies I mentioned, where we kind of distribute these coupon codes and people redeem them online or in-store, and then we earn an affiliate fee. And that business is just growing like weed. It’s just been kind of fantastic month-over-month growth, but because we’re – in the aggregate the fact that we did nearly $1.9 billion last quarter alone, even though that business is growing really quick, it’s still small relative to the overall business. And so we don’t call it out.

The only thing I would add is in terms of just kind of the selection and inventory, we have about 35,000 coupons in about 7,000 stores available through Freebies right now and continue to expand. Brian Fitzgerald – Jefferies & Co: Great. Thanks guys.

Thank you. Our next question comes from the line of Tom Forte of Brean Capital. Your line is open. Please go ahead. Tom Forte – Brean Capital: Great. Thanks for taking my question and thanks for the traction of the North American local. So how should we think about the use of branded deals, Starbucks and things like that, versus digital advertising, where I know you’re very good in tracking your return on investment as far as reaching more effective at driving, both sales and the different impacts they have on the margin as well? Thanks.

So I can give you some anecdotal commentary, but I wouldn’t profess that to be able to give you a perfect answer. I will tell you that when we run national deals like Starbucks or Whole Foods or any of the variety of people, we just ran iTunes recently. When we – and you can see it from the rate of sale. When we do a Starbucks deal, we can sell hundreds of thousands of units in hour. These things can really generate some significant volume. And we have been a very good source of driving both new customer acquisition for these big brands, as well as some of the stuff they really want, which for example, might be people that download their app or to engage with them in new way. And so I think if you look at Groupon in the aggregate, we are one of the most successful forms of advertising that exists, because it’s all performance-based advertising. You put a deal up of some kind, and the only way the merchant is giving anything away is that the customer actually walks in the door. And so it’s completely ROI based. You can measure its effectiveness instantaneously, as opposed to when somebody might run a more general branded campaign on television or in other forms or advertising where it’s harder to measure. And obviously it’s been effective, because the Groupon is not even six years old and reaching to $8 billion. So it’s been widely adopted. Tom Forte – Brean Capital: Thank you.

Thank you. Our next question comes from the line of Heath Terry of Goldman Sachs. Your line is open. Please go ahead. Heath Terry – Goldman Sachs: Great. Thanks. I was wondering if you could give us a little bit more color on the kind of adoption that you’ve seen for some of the newer merchant services offerings, whether it’s pages or Gnome, especially to the extent that you’re starting to see some replacement of normal payment systems through that? And then what kind of – as well as sort of reservations and some of the other offerings that you’ve got. And then to the extent that there is a sense of these things for the merchants that are using those offerings, what kind of difference you’re seeing in, either revenue per merchant or uptake of the deals that those merchants are offering among consumers?

Yes. So there is a lot in that question. So let’s start with Gnome for a second, right. So Gnome is still a very new product for us. We just rolled it out. I think we began talking about it in last quarter. We were in about 75 markets, but just rolling out in those markets. We’ve deployed over 6,000 tablets, which is quite a bit when you think about the absolute number, but obviously given the fact that Groupon does business with over 800 or has done business over 800,000 merchants, we have a long way to go. But the 6,000 market, they are predominantly fulfilling multiple merchant needs. It’s a redemption device, which helps our consumers redeem. It can be a point-of-sale system for those merchants that don’t have one, and roughly 60% of our merchants don’t have a point-of-sale system. It has payment capabilities, and obviously it’s a tool to collect reviews. Hence we talked about a minute ago, we’ve collected and now starting to make public to nearly 20 million ratings and reviews that we have. And basically, what we’ve seen in this original deployment of Gnome is that merchants are using it, customers are using it. The payment attach rate, the number of merchants that are signing up for payments has been higher than we would have thought. I can’t tell you the exact number, because we’re not disclosing it, but it has surprised us in how many people are signing up for payments. So we think there is a really interesting long-term opportunity there. But the main goal of this tool is to basically allow merchants to try to figure out what’s happening at an item level, and why is the day slow, why aren’t customers coming in, which sales people are doing bad, which items are selling or not selling. And as merchants can start to get insights around that item level volume, they can access our community of 250 million subscribers and 150 million visitors and 100 million app downloads and all that stuff. They can access that to basically move that inventory. And that starts to get at the real problem we want to get at, which is kind of real-time yield management in local commerce. So it’s early. The stats are encouraging, but not big enough to really kind of paint the full picture. And in terms of revenue per merchant, right now we’re deploying these Gnome tablets to the merchants that we’re already working with. So we haven’t seen any real significant change for economic model in part, because the way the tablet program is designed, we neither really make a lot of money or lose money from it. It’s really economically agnostic for us to deploy a tablet or not. And obviously the deals are selling on our site the way they sell, and that’s not really influenced by whether or not somebody has a tablet or not. Heath Terry – Goldman Sachs: Great. Thank you.