Good day, everyone, and welcome to Groupon Second Quarter 2015 Fiscal 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 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 second quarter 2015 financial results conference call. On the call today are Eric Lefkofsky, CEO; Rich Williams, COO; and Brian Kayman, Interim Chief Financial Officer. The following discussion and responses to your questions reflect management’s views as of today, August 7, 2015 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 today’s Press Release and in our filings with the SEC, including our Form 10-K. 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. 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 2014 and are excluding year-over-year changes in foreign exchange rates throughout the quarter. In addition, historical results have been recast to reflect TMON as a discontinued operation in all financial information and operational metrics discussed on this call pertain to continuing operations. And now, I’ll turn the call over to Eric.

Thanks, Genny. Q2 marked continued progress in Groupon’s evolution from our daily deal e-mail roots into predominately mobile, local commerce marketplace. While our turnaround is not yet complete, we’re making headway. Let me start with a quick overview of our financial performance in the quarter. Like last quarter, every number and metric we provide now excludes TMON and all year-over-year comparisons are FX neutral. On this basis, gross billings increased 10% year-over-year to $1.5 billion for the quarter, and revenue increased a 11% to $738 million. Gross profit was $337 million, adjusted EBITDA came in at $61 million, and we delivered $0.02 of non-GAAP EPS. Changes in FX rates, the euro in particular, continue to negatively impact us in the quarter. Had they remain neutral to last year would have delivered $126 million more of billings, $54 million more of revenue, bringing revenue to $793 million, and $28 million more of gross profit, all in all, we delivered a solid quarter while continuing to invest in marketing and order discounts to fuel our marketplace transition. Let me run through the highlights. In North America, gross billings increased 12% to $896 million, driven by growth in all categories. North America revenue increased 14% to $481 million, and segment operating income improved by almost 85% to $27 million. North America local billings grew just over 8%, which is respectable growth despite a tough comp. While last year’s second quarter saw local billings growth of only 2%, it represented the highest billings the business had posted through that date with billings of $461 million. In Q3 of last year, local billings dropped to $447 million. As a result, even though on a percent basis, Q3 seems like the harder comp, since we’re lapping a quarter with double-digit growth. It is actually 2Q that…

Thanks, Eric. Since taking on the COO role in June, a few things have become clear. First, Groupon continues to be a tremendous platform to connect local businesses and customers in dozens of countries around the globe. Our brand is strong and we believe our value to both merchants and consumers is undeniable. Second, while we’ve come a long way in globalizing our operations. We still have significant opportunity to share and deploy our best practices, best products and best experiences from North America to our international businesses. Third, we need to continue to streamline, focus, and simplify what is a complex global business. Now, our core focus remains unchanged making the Groupon marketplace a daily habit with an unparalleled customer experience. Our marketplace offers many different types of deals; local, goods, travel, events, coupons and we’re often asked how to rationalize the seemingly disparate businesses. While we’ve historically discussed them as three categories, Local, Goods, and Getaways; internally, we’ve come to think about them in two, services and shopping. Our marketplace is built to serve both, yet each has a distinct operating model. In Local and Getaways, we source inventory and sell it on commission, while Goods primarily operates in the classic e-commerce model, where we buy inventory and deliver to customers through our fulfillment network and through drop shipping. Moving forward then, when we discuss services, we’re talking about the offerings that have historically rolled in the Local, plus those that have historically rolled in the Getaways. The shopping category today consists of goods. Viewing the business through this lens is a great simplifier. It’s how we operate and it’s generally how customers think about our marketplace. Brian will discuss how we expect this to impact our reporting going forward. Across both services and shopping, our marketplace fundamentals…

Thanks, Rich. I’m going to run through the highlights of our performance and provide our outlook. The details are also available in this morning’s press release. Please note that all comparisons unless otherwise stated refer to year-over-year growth, are FX neutral and do not include TMON. Gross billings increased 10% to $1.53 billion in the quarter. North America grew 12%, EMEA grew 9% and Rest of World grew 6%. Revenue increased 11% to $738 million in the quarter. North America grew 14%. EMEA grew 9% and Rest of World declined 4%. Gross profit was $337 million or about flat to last year’s second quarter had it not been for a $28 million FX headwind. Our gross profit was negatively impacted by a significant increase in order discounts as order discounts are reported as a reduction to billings rather than as a marketing expense. Adjusted EBITDA was $61 million in the quarter compared to $60 million last year, as lower gross profit was mostly offset by lower operating expenses, both due to the impact of FX. GAAP earnings per share was $0.16 including $0.21 related to the gain on the TMON sale. Non-GAAP earnings per share was $0.02. Free cash flow for the second quarter improved by $45 million, to negative $12 million, brining free cash flow for the trailing 12 months to $267 million. As of June 30, we had $1.1 billion in cash and cash equivalents. As it relates to our share repurchase program we repurchased 19.3 million shares in the quarter at a total cost of $122.7 million. We have now completed our original $300 million authorization and have begun repurchasing shares under our recently announced $500 million program. Approximately $461 million remains available for repurchase under that authorization. While the timing and amount of any repurchases is…

Thanks, Brian. As you can see we are laser focused on completing the marketplace transformation that began a few years ago, adding more merchants to our platform and allowing our customers to buy, book, reserve, redeem, and pay for local goods and services seamlessly through our app. As we aggregate more inventory and improve user experience, we believe conversion will rise, and we’ll be able to efficiently invest to drive traffic and transactions unlocking new pools of growth. As such, we now turn our attention to making our product truly indispensable to consumers looking to explore the world around them and save money while they’re at it. We aspire to be the best kind of daily habit one of surprise and delight, a place you start, when you’re looking to do or buy just about anything locally. As we seek to connect local commerce and reward every day curiosity, we’re mindful of how far we’ve come and how far we have yet to go, given the size of the opportunity before us and the fact that we’re still only six years old, despite the scale at which we operate. With that, let’s take some questions.

Thank you [Operator Instructions] And our first question comes from the line of Ross Sandler from Deutsche Bank. Your line is open.

Hey, guys. Thanks for the new slide presentation. So I just had a couple of questions. First is one the characterization of higher-frequency categories, I guess, at a high-level, what percent of billings or units are in these high-frequency categories today? And where do you expect that to go? And then if we look at a transaction frequency, so what does that look like in higher density markets, where you do have a mix of – a greater mix of higher-frequency categories like Chicago versus the overall company average? Second question is just around, you’d mentioned that EMEA take rates are coming down in both Goods and Local. Can you just give us a little more color about what’s going on there and are the current take rates that we’re seeing the sustainable level? And then lastly, so it looks like you’re reducing the guidance for EBITDA for the full-year by about $25 million. So how much of that is just from integrating OrderUp versus doubling down on like the organic business, as you just mentioned a few of those investment initiatives? Thanks.

Hey, Ross, before – I’m going to – Rich will take part of that in terms of the high-frequency use case in EMEA take rates and then I’ll let Brian – let him cover the guidance. But before, I just want to give some quick two seconds of context on the quarter and the business. Look, a few years ago, we realized order to grow at scale we had to build a marketplace, and then our e-mail business was just too limiting. So we built the product, right, it went from a 1,000 deals to over 5,000, migrated to mobile 110 million app downloads. And although, our existing customers are really starting to use the marketplace as evidenced by the fact that over 30% of business now comes from people searching on our site, we still have to complete the last key piece of this marketplace piece of transition. We have to fundamentally shift consumer behavior. If you think about it, for our business to double in size, one of the few things has to happen in essence either our existing customers have to buy twice as much, or we have to add twice as many new customers. To get our existing customers buying more, they have to think of us as a daily utility. We have to offer more deals, the right kind of deals in the right locations and particularly in these high-traffic use cases that you heard us talk about, lunch and dinner including takeout and delivery, massages, pedicures, events and activities, and we also have to marry our marketing efforts in SEM and SEO to the inventory we have, and really focus on conversion, so we can effectively and efficiently invest in adding more customers. We got to get our existing customers buy more and add more customers. And that’s what all of our energy in investments right now are focused. Marketplaces take time to build and I think people don’t realize ours is only a couple years of old. So clearly, we’ve got a great foundation. We have a huge customer merchant scale, but we got to get these high-frequency use cases and marketing efforts right to see the kind of acceleration we want to see in our core business. And if you look at the investments we’re making in certainly the $25 million we intend to invest in the back-half of the year, it’s really all focused around that. But let me pass it over to Rich to cover the percent of billings to complement in most cases.

Hey, Ross, it’s Rich. So on high-frequency categories, I’d say just a couple of things to think about there. One is, of course, we don’t breakdown Local into the subcategory mix details. And a big piece of that is, there’s over a 150 subcategories that we operate in and literally over 1,500 different service levels within there. But an easy way to think about it is, is that – it’s a, over half of Local would be in this, but we would think of it as high-frequency categories. But it’s less about where we are today there and really where we should be. So if you just look at it in a really basic light and this is – people were talking a little bit about frequency, as well. Even if it’s – even if we’re over half or in these three categories, people are eating out or at or from a restaurant five times a week or eating three times a day. So, with an average customer frequency around five a year, we’re just – we’re well underpenetrated versus the potential in the marketplace overall. So I think it’s really about – more about the potential of where we can go with high-frequency categories over time than where we are today, and what percentage of our unit makes it, makes up. If we’re successful in those places, I would expect the mix to change significantly, and frequency, we believe would go up at a time as well. With respect to the actual markets and how to think about customer frequency in higher density markets or the bigger markets we operate in, it’s a little bit of the same thing that you just expect a way to think about it is that in our biggest market is where we have…

And [indiscernible] guidance part?

Sure, hi, Ross. Let me give a little bit of background on our entire guidance. From a revenue side, we reiterated $3.15 billion to $3.3 billion. And we’ve seen the fundamentals be consistent and strong. With respect to the adjusted EBITDA, we wanted to grow to the next level. It’s as simple as that. In the high-frequency use cases that we talked about, they’re going to take investments in things like marketing, discounts, additional SG&A. And they’re going to include our recent entry into the entirety of the take on delivery space, which the order acquisition is a part. So net-net, we’re going to move guidance from $315 million to closer to $290 million. I want to give a little context too on Q3. And as Rich discussed, we’re focused on goods margins and our revenue guidance contemplates higher-quality revenue and a $700 million to $750 million target. And the adjusted EBITDA basically for Q3 is the same story with about half the investment coming into our $45 million to $65 million target.

Thank you. Our next question comes from the line of Paul Bieber of Bank of America Merrill Lynch. Your line is open.

Good morning. Thanks for taking my questions. Two quick questions, what gives you confidence that the North America local billings can return to double-digit growth in the third quarter? I think, historically, you’ve given the order discount number in dollars, what was that in 2Q?

So I’ll start out on the North America piece and our confidence there and then we’ll move on to order discounts in Q2. I mean, first and foremost, I’d say, we feel good, we’re making good progress in North America, where local billings are at 10% up year-to-date. That includes, of course, a little bit of a dip down to 8% in Q2 on what was a very comp in sheer dollar terms. But we’re still confident for a couple of key reasons. I mean, first, I’d say, the marketplace fundamentals, they remain strong. And in North America we more than doubled our deal count versus a year ago to roughly 240,000 today. And that’s still out of a total of 4 million targeted merchants. So we still have a long way to go there and we’re making steady progress on that front, also continuing to see steady progress in active customer growth with our active customers growing about 10% year-over-year. And we’re continuing to see traction on search as a percentage of our transactions, now at 30% up from 23% a year ago. So that confidence is built on the basic recipe, which is the basic recipe that helped us drive now a double-digit local growth for roughly the last year. The second piece of that that adds to the confidence, of course, is that we’re off to a solid start in Q3, as we mentioned and everything that we’ve seen so far lead us to believe that that we’d expect to see the growth trend continue.

And on the absolute numbers our order discounts for the quarter were $39 million compared to roughly $21 million Q2 of last year, for an increase of about $18 million.

Okay. Thank you.

Thank you. And our next question comes from the line of Ralph Schackart from William Blair and Company. Your line is open.

Good morning, Eric. It’s always been part of your long-term strategy to make it easier to use the Groupon, reduce the friction, and then increase the time from when you buy it to use it. Just curious kind of if you could get some metrics around this, what you’re seeing in the recent quarter. Do you feel that supply is kind of a key issue to sort of get you to this longer term strategy? But any color on that would be great. Thanks.

Yes. I mean, so – certainly I think it’s part of this marketplace evolution. I mean, if you think about it. And it’s just hard to imagine, but we don’t even have the search box a couple of years ago. So we now talk about search being 30% of our business, we didn’t even have a search box, and a few years before that e-mail was virtually 100% of our business. So we have to get this product. The product piece here has not been immaterial. We had to basically build an entire marketplace in terms of the app, and the sight and touch. And then we had to populate it with deals. And we were this episodic e-mail push business and we’ve had to basically fill our shelves with inventory and try to figure out how to do that, and it’s taken a significant amount of time. But with over 500,000 deals, we’re starting to get to the right density that makes the product in many cities pretty good, but it still when you think about it in North America we have less than 10% of available merchants. I think there are about 4 million target merchants on the site. So far too often you still come to – you still come to the site, and you don’t see the kind of density of deals that you’d want to see, it had to be really useful. And that’s why we talk about these high-traffic use cases and getting the right inventory on the site as being so critical. That’s part of it. That other part is actually making the product better. From purchasing to booking and making reservations to paying through the app, there is a ton of work that the team is doing to really make it much…

Okay. Thank you.

Thank you. Our next question comes from the line of Brian Fitzgerald of Jefferies. Your line is open.

Thanks, guys. A couple of questions, one on Breadcrumb, can you give us an update there? What trends are you seeing there in terms of usage, new sign-ups? And in general, what’s been the level of interest from restaurants and other merchants? And then, maybe similarly an update on coupons business; what traction are you seeing there, and have you seen any impact from any recent algo changes? Thanks.

So let me start with the breadcrumb. So, look, we got into the point-of-sale business a few years ago, and we’ve invested a significant amount of time and energy in trying to figure out how our current offering integrates in point-of-sale and it’s been – the learning’s have been fantastic for us. It’s part of this whole OS initiative to really figure out what tools are going to help merchants run their business better and most importantly upload inventory on to our platform. The whole point of all these OS initiatives is getting merchants think [ph] they’re having it to be super simple for them to basically say, hey, I’ve got to open tables today or two open timeslots, let me upload it. And Breadcrumb has done quite well in its space, which is really kind of higher-end restaurants, has thousands of merchants on the platform. It’s growing nicely. It’s doing well. What we’ve come to realize those that – the main focus and you heard, Rich, talk about this, the main focus of our initiatives on the OS side are really our app. We messed around with hardware for a while and try to figure out well, can we put tablets in merchants, can we put point-of-sale systems in merchants, then we looked around and said, oh my God, our app is in hundreds of thousands of merchants around the world today, and they’re using it all the time. So instead of having a hardware-centric solution, why don’t we have a software-centric solution. So we’ve done some – our thinking here has evolved a bit. And right now, our focus is in which the Breadcrumb is to make sure that that team continues to grow and again we evaluate Breadcrumb like we evaluate all of our markets and countries and try to figure out, can we win and how do we win and how do we position that business for success. But in general, that’s doing just fine. And I’ll let Rich cover coupons.

Hey, Brian. So on coupons, I mean, we’re pleased with our progress there, it’s just been steady consistent progress. If you look at just the offering that we have, we ended Q1 with about 60,000 coupons and that’s now grown to about 70,000 coupons and offers on the coupons platform, as we exit Q2, still almost entirely in North America, and those 75,000 coupons coming from almost 9,000 stores. So good traction there on the supply side, which just keeps improving the customer experience. And it’s just another way for us to get people to think about Groupon first when they’re out and about whether that shopping for products or for local services, so good traction so far. But the thing to keep in mind, it’s still an early product and it’s still early for us overall; and us today, it’s not material to financials. With respect to what we’re seeing on the algo side, so far with us we haven’t really seen any material changes or any material impact to our business, in the SEO front, positive or negative. It’s really – our focus continues to be on building great quality pages for customers and then taking that customer experience first approach to developing our content in our products and ultimately feel that will benefit us on the SEO side, no matter what happens and the more you focus on just unique content and great experiences you tend to benefit just fine there.

Great. Thanks, Eric. Thanks, Rich.

Thank you. Our next question comes from the line of Mark Mahaney of RBC Capital. Your line is open.

Thanks. Maybe I’ll throw in three quick questions. Any broad comments on how you get active customer growth to reaccelerate? Second, the comment that the mix shift towards lower margin goods was just a temporary phenomenon, or why is it temporary? Is that something that you think you’ll see in terms of consumer behavior will switch back, or is that something you’ll just try to drive? And then finally, I think there is a quick comment about revenue and EBITDA growth at a 15% rate. Was that through 2016 or are we just commenting on what the obvious growth rate was for 2015? Thank you.

.: And if I think the active customer piece, the biggest chunk of that’s going to come from that marketing kind of machine that we’ve been talking about, where you get the right amount of inventory in the right cities, and you get conversion up and then you can more effectively spend money. Like, I often say to people, our business is very similar in lots of ways to booking.com. They went out, they aggregated all kinds of proprietary, which is difficult to aggregate inventory and then spent years focused on conversion, so they could really efficiently spend money to drive customers in the top of the funnel. And that’s exactly what we’re just starting to do now, we’ve just been at this for a couple of years. But, Rich, you may want to add on to that.

I think that’s really the key is us continuing to just happen to be both existing demand on our platform. So we have over $80 million unique visitors in North America alone in well North of 150 unique visitors worldwide. So we have significant demand that’s already on our platforms. So we’re going to continue working on converting more of those folks into buyers, and, of course converting more of the existing customers we have to more frequent buyers. And obviously, supply, it’s a big piece of that, it’s getting the right deals in the right places and in front of customers at the right time when they’re looking for it, and then there’s just going to be a big piece of tapping into that broader demand, and that’s just going to take smarter approaches on sourcing inventory as well as continued advancement in our computational marketing efforts. So we’re pushing forward on all fronts on those pieces. Just shifting to your question on EMEA goods and whether it’s a short-term or a long-term challenge. And I think as we said, we believe it’s a relatively short-term issue. And while, of course, customer behavior plays a part in that, because customers choose what they buy. There’s also a big piece of that with us, that we choose what we present the customer, especially in Europe where the marketplace isn’t as developed as it is in North America. Pushes is still a bigger part of that business. And that’s a piece we’re focusing on most. It’s really managing the mix of the products that we put out, managing vendor relationships with more stringent controls and we’ve made some changes on that front and put some different guidelines in place for the teams to help get margins into a healthier place. And we believe that that collection of changes that we put in place and some of those some of the checks and balances that we put in place over the last little stretch here will over time put us into – back into more historic levels there, and which we’re confident about.

And on the increase in the guidance around 15%, we’re obviously testing a lot of things and as we look at those tests we’re going to continue to evaluate. But we’re looking at the 15% as going through 2016. We are still focused on our longer-term targets laid out in investor day, and will keep you posted as we move through this.

Okay. Thank you very much.

Thank you. And our last question will come from the line of Heath Terry from Goldman Sachs. Your line is open.

Great, thanks. I was just wondering if you could give us a little bit more of an update on pages sort of where you are in terms of the count, the number of pages that you’ve been to develop thus far, what kind of penetration and adoption that you are seeing from the merchants in the group, and what impact that’s having to Mark’s question on the effort to build active users. And then, I guess, just one sort of financial question. The decision to merge travel and local into a metric, obviously, those are two businesses with a lot of different dynamics in them. So seeing those merged is going to is – I think kind of make a lot of – a little bit more difficult to analyze the health of particularly that local business. Do you have any intention of continuing to breakout anyway metrics specifically on local?

So let me start with pages and then Rich can start to cover the services piece. So, I mean, we now have over 2 million pages indexed on Google. They are doing well. We continue to gather reviews and tips. And they’re doing all of the things you’d want them to do, right, which is basically drive traffic. And over the long-term, we expect these pages to be a significant contributor to revenue, but it’s still a new product for us relatively speaking. And so, right now, the big effort has been to populate them with enough content that they can be indexed and indexed high in Google and that – or another search engines and that they begin to rise. One of the best parts about Groupon is we’re so mobile and we have so much rich content by evidenced the fact that basically [ph] 30 million people have left a tip or review a rating, that these pages tend to raise over time both the natural SEO ranking, and they get ranked very high in mobile. And so we expect these to be over time a really meaningful contributor and our customers are obviously loving the fact that 1.3 million people have already hit, request a deal, or begun following a merchant, is evidenced in the fact that over time we’re going to be a very large collector of review content and a place that people go to try to learn about merchants and figure out where they ought – what they should try and where they should eat and what they ought to do locally.

The only thing I’d add to that is that, as we continue to build out supply in that combination of high discount inventory, high margin inventory, lower discount inventory, lower margin inventory, et cetera, that’s going to play more and more over time into that active customer growth piece. Today, these are with lot of rich content on these 2 million pages and a lot of great interaction on these pages. But we don’t have 2 million active deals. We’re at 240,000. So we have some work to go – work to do in that front to help make the pages more transactable for customers. And then it’ll start to – it could play more in that long-term active customer piece. So now shifting on to the services, accretion of the services category, I mean there is obviously some different dynamics in this space. But when you really think about the operational side of those businesses, they’re actually very, very similar. How we source inventory and the basic business model and the inventory is extremely similar. And ultimately, we believe it’s generally how people view our marketplace, where it’s really about the things that you want to do when you’re out and about, and how you get there and where you stay. It’s much more in the domain of the services space, than really separating it in between local and travel. I think, as Brian mentioned, we’ll continue to break them out throughout the next quarter, so you can have some broader insight into local. And then, from there, Brian, again, is anything else to add?

No, I mean, I think through the end of the year we’ll continue to break out that information.

Okay, great. Thanks.