Groupon, Inc. (GRPN) Q4 2015 Earnings Report, Transcript and Summary

Welcome to Groupon's Fourth Quarter and Full-Year 2015 Financial Results Conference Call. [Operator Instructions]. I do want to let you know that today's Conference Call is being recorded. Now for opening remarks, I would like to turn the call over to VP of Investor Relations, Tom Grant. Please go ahead.

Hello and welcome to our fourth quarter and full-year 2015 financial results Conference Call. On the call today are Rich Williams and Brian Kayman. The following discussion and responses to your questions reflect Management's views as of today, February 11, 2016 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 foreign exchange-neutral results. In our press release and our filings with the SEC, each of which is posted on our Investor Relations website, you will find additional disclosures regarding the non-GAAP measures including reconciliations of these measures 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. Now, I will turn the call over to Rich.

Thanks, Tom. 2015 was a year of significant change for Groupon. As Groupon turned seven years old, we saw continued progress toward our vision of building a daily habit in local commerce. We continue to be one of the best new business drivers at scale for local merchants. We continue to grow and evolve our marketplace. We continue to increase traction among customers. We continue to have much left to do. 2015 was also a tough year for Groupon with seven years of pioneering in local, we've learned some hard but valuable lessons. We learned that our supply and product efforts will take much longer than expected to drive the kind of growth we believe is possible. We learned that we weren't focused enough on high frequency local categories and that they would require investment to unlock their potential. Similarly, we realized that empty calories in our shopping business might be good for revenue, but that they often weren't in line with the long term health of the business and model. We realized just how critical it is to focus our energies on levers that make sizeable impacts on the business long term. These lessons contributed to us lowering our outlook multiple times during the year which eroded confidence in our business and team. It became clear that we needed to make some tough decisions and some big changes. When I moved into the CEO role in November, we made those tough calls along with some big commitments. Commitments to streamline and focus the business, to improve our shopping business, to invest in bringing more customers to our marketplace. Our results show that we're making good on those commitments. Q4 was our kickoff. We delivered a stronger-than-expected fourth quarter and finished 2015 buoyed by healthy holiday demand across our businesses. For Q4, we exceeded the top end of our range on revenue, adjusted EBITDA and non-GAAP EPS. In North America, where we're concentrating our efforts, Q4 marked the eighth consecutive quarter of double-digit growth as well as sequential acceleration in active customers and spend per active customer. Marketplace fundamentals steadily improved with record levels of supply and search-related transactions. We held North American local growth stable at 7% where it continues to track overall customer growth trends. Until we significantly boost new customer adds and give a few quarters for those new quarts to mature, we expect that North American local growth will stay closer to its current level. On virtually every front then, we've moved faster than expected and are seeing early results. Accordingly, we're raising our full-year adjusted EBITDA guidance as we expect continued strong execution and an ability to invest in growth while channeling more efficiencies to the bottom line. Before I turn it over to Brian to go into more detail on the quarter and our outlook, let me quickly comment on how each of our focus areas contributed to our results. When I stepped into my new role just about a hundred days ago, I said that I didn't need 100 days before sharing my plan for putting Groupon on a stronger growth path. I knew that would likely sound more like ego than strategy, but I'd been at the Company for four-plus years. I knew that I had to move fast and I knew what needed to change. First, I said we would streamline the business, both in terms of where and how we operate. We biased our streamlining efforts to our international operation. When we entered 2015, we were operating in 47 countries. We're now operating in 28 countries and are quickly moving closer to the footprint we want to operate and grow long term. As we reduced our footprint and increased our focus on key geographies, we've begun to see proof that we're on the right track. In EMEA for example, we returned profitability to previous-year levels, aided by our restructuring efforts. As expected, these kind of gains create more opportunities to reinvest in the business yet create pressure on go-forward revenue. We still believe we're making the right tradeoff. As we continue to focus our energy and investments on North America and our top Markets, our goal with our broader international business remains stability. That means less of a focus on international growth and more of a focus on stabilizing the core business inputs and improving efficiency. For example, compared to the prior year, international active customers, gross billings and units declined. International local gross billings growth, in particular, continues to be a challenge as we believe we're one to two years behind North America in our migration of the marketplace model. These challenges reflect our decision to reduce investments outside of top markets in both time and marketing spend and are challenges we expect given country closures, FX headwinds and our international business' reliance on e-mail. As our teams stabilize these trends, we will continue to make progress on our restructuring efforts geared to centralize and simplify our deal factory and service operations. Our streamlining efforts were not just limited to geographies, however. We also made the decision to integrate businesses like Ideal which now live inside the Groupon experience instead of as standalone properties that require large standalone teams. We exited the shopping business in some APAC Markets where we did not see the opportunity to build a thriving, healthy business and experience for customers. We're stopping dozens of initiatives that aren't making the Groupon experience materially better for customer and merchants. We intend to continue to focus our teams, streamline our operations and refine our geographic footprint throughout 2016. Second, I said we would move away from empty calories in shopping. We delivered a solid holiday experience for customers around the world, particularly in North America, with a record Black Friday and cyber Monday stretch. At the same time, we were able to improve shopping margins by 150 basis points year-over-year and across all segments despite competing at the front of the most promotional time of the year. The shopping team delivered these gains by focusing on the action plan I described a quarter ago, emphasizing higher margin categories like health and personal care, jewelry, home goods and apparel, strategically using low margin products as targeted marketing events and delivering core Supply Chain and logistics improvements. We need to apply and learn through this model outside of the peak times at the Fourth Quarter, but we feel confident that we can build a differentiated, more profitable shopping business over time. One that is engaging to customers and that delivers both gross profit and adjusted EBITDA growth. Last, I said we would rekindle our customer acquisition efforts and significantly increase our investments in Marketing to drive millions more customers to the marketplace. We continue to believe that adding acquisition Marketing to our transactional Marketing efforts has significant long term growth potential for the business. The kind of cohort data that showed us we should invest more in customer acquisition held strong as we increased Marketing investments by over $20 million sequentially. Most of which was in North America and in line with our plan that we shared on our November call. The holiday season bias tilted spend toward transactional Marketing though the team was able to gain some valuable data while helping to spur customer growth. Expect more focus on new customer acquisition including off-line advertising in future quarters. The end result was adding 645,000 active customers in the quarter. The most we've added in five quarters. In addition, in North America, we decreased order discount sequentially by $9 million as our team tested more targeted programs seeking to find the ideal balance of investment in existing customers, accelerating marketplace behavior and new customer acquisition. Q4 was the beginning of our ramp in Marketing, the real push in customer acquisition investments started this January and the team still has a lot of territory to uncover over the course of the next few quarters. Across all three of these areas, streamlining our business, improving our shopping margins, customer acquisition, we still have much to do. And, while we're off to a solid start, given the speed and magnitude of changes we're undertaking, we don't expect things to be easy. Regardless, we expect to exit this year with a business we're excited to grow for the long term and with slightly higher adjusted EBITDA than previously anticipated. Let me pass the call over to Brian for more color on our results and our outlook.

Thanks, Rich. Let me first highlight our Fourth quarter results. Please note that all comparisons, unless otherwise stated, refer to year-over-year growth and are FX-neutral. As Rich mentioned, we delivered a strong end to an up-and-down 2015. Revenue increased nearly 9% to $917 million. Adjusted EBITDA was $67 million for the quarter and non-GAAP earnings per share was $0.04. All three metrics which we announced during our Third quarter call, exceeded our expectations. A record breaking Black Friday weekend and seasonally strong holiday period drove our better-than-expected performance. You can see the strong holiday demand in our Fourth quarter gross Billings growth of nearly 5% to $1.71 billion. Other metrics showed similar strength. Gross profit increased 4% to $372 million and trailing 12-months Free Cash Flow increased by $39 million to $208 million. In addition to strong seasonal demand in Q4, we made progress on our strategic initiatives. First, we improved margins. Our North America gross profit increased 12% to $219 million in Q4. North America shopping margins improved to 10.3% as we successfully de-emphasized our low margin offers, reducing our mix of consumer electronics by 200 basis points in the quarter and our mix of low margin promotional offers by nearly 40%. We also improved the number of items in each shipment by over 15% year-over-year. North America services margins also improved. Local take rate increased to 34.7%, largely as a result of reduction in order discounts. Order discounts were $27.5 million and as a percentage of billings declined 160 basis points. All this during the most heavily discounted shopping period of the year. Our focus on shopping margins remains and we intend to target further improvement in product mix in the first half of the year which could impact revenue. We also plan to continue to refine the types and amounts of incentives needed to improve purchase frequency across the business so we expect to see overall margins vary from quarter to quarter. Second, we began scaling our marketing efforts in North America which led to an increase in active customers. In Q4, we added 645,000 active customers in North America, ending the year with 25.9 million customers, an 8% improvement. This compares to active customer additions of 400,000 and 349,000 in Q2 and Q3, respectively. The sequential improvement in active customers differs from prior-year results when active customer additions dropped from 834,000 in Q3 2014 to 598,000 in Q4 2014. Q4 was the initial phase of our marketing investment increase and we began scaling our ROI thresholds to 12 to 18 months. Our North America spend, exclusive of order discounts, increased to $61 million during the quarter which is a $25 million increase quarter-over quarter and a $27 million increase year-over-year. We deployed the incremental marketing expense across all channels including display, SEM, mobile App downloads, subsidized deals and off-line and we focused primarily on our North America segment. In line with the plan we shared last quarter, Q1 2016 will see significantly higher levels of marketing investment as we continue to supplement our transactional marketing with investments to drive new customer acquisition and activation. Our plan to spend an additional $150 million to $200 million in 2016 remains on track and we expect to begin to see the benefit of our investment in the back half of the year. Third, we made real strides on our efforts to focus and streamline the business, particularly in our international markets. We announced a restructuring program a few months back. This program allows us to bring focus to important areas of our business. For example, our EMEA Customer Service organization is now mostly centralized, serving customers from across the region. This is a major shift from having over 20 separate teams across Europe and we expect our efforts to increase customer satisfaction in EMEA while delivering efficiencies. We're also on track to have our two European deal factory centers fully operational in the second half of this year. In the few months that have passed since announcing our restructuring, we quickly exited 17 countries, reducing our global footprint to 28. As a result of these efforts to streamline and focus our business, EMEA gross billings declined 2% to $487 million year-over-year and gross profit declined 4% to $123 million. EMEA segment operating income increased to $37 million on improvement in SG&A. Rest-of-world gross billings of $169 million declined 7% and segment operating loss was about $7 million. As we think about the economics to date of our restructuring efforts, we've yet to realize significant quarter-over quarter SG&A savings. We have incurred some duplicate costs to set up shared service centers and close some operations. As the impact to geography stabilize and savings materialize, we expect to continue to reinvest in high frequency use cases such as our food and delivery business and potentially, in additional marketing. Now, let me turn to guidance. We're in the midst of executing against some major strategic initiatives that we believe can unlock our true, long term potential as a daily habit in local. In the short term, we're taking actions that affect our revenue, earnings and margins in varying degrees and we expect our actions to result in some uneven quarters. In order to be nimble in our decision-making and remain aligned with the long term interests of the business, we will only provide annual revenue and adjusted EBITDA guidance, updated quarterly. Our 2016 guidance for revenue is unchanged. We expect our 2016 revenues to be between $2.75 billion and $3.05 billion. In our outlook, we're balancing the positive trends we saw in Q4 in revenue and active customers with our success in quickly reducing our global footprint by nearly 40%. As such, our previously stated annual revenue range remains and we expect the traditional Q4 heavy weighting to continue. Considering our speed in exiting lower margin businesses via our restructuring, we're increasing our expected adjusted EBITDA range to $80 million to $130 million. As always, our overall guidance reflects current FX rates and our results may be materially affected by various factors including a high level of uncertainty surrounding the global economy and consumer spending as well as exchange rate fluctuations. While it has only been one quarter since we have begun implementing the core strategic initiatives that Rich laid out in November, we're encouraged by the initial results. Q4 was a strong quarter. Groupon was frequently mentioned as a top holiday shopping destination. Our revenue reflects that and our adjusted EBITDA reflects solid execution. But, our need to invest remains and our plan to make decisions throughout the year that will best drive long term values remains unchanged. We look forward to continuing to update you as more of our efforts take hold and are reflected across our business throughout the balance of 2016. I'll now hand the call back over to Rich.

Thanks, Brian. We made significant progress over the past 100 days. I'm even more convinced today than I was 100 days ago that streamlining our business, moving away from empty calorie growth and increasing our customer acquisition investments are the right changes for Groupon. They have us building a more sustainable path to growth and a world class operation lead by a strong team. That said, as we look to our vision and our long term view of the potential in this business, we need to change something else. The customer experience. Without question, we've made improvements over the years, but the core Groupon experience simply hasn't moved far enough or changed fast enough. Too often customers can't find what they're looking for. Groupons still expire and we haven't yet moved beyond the long list of deals that are interesting to scroll but not suited to a true marketplace experience. The same kind of program and execution discipline that are driving gains in our three other focus areas need to apply to the customer experience fast. We plan to deploy the product and engineering horsepower we freed up in our streamlining initiative against this challenge. So, in 2016, we'll continue to execute on our three focus areas and we'll make something that might feel like cost of entry an explicit fourth, dramatically improving the Groupon customer experience. Not only do we believe that it will help us move faster along achieving our vision of becoming the daily habit in local, but better customer experience should help us increase the long term leverage in our customer acquisition investment. These are the four areas we'll discuss throughout the year. We're moving fast and making big changes to the very foundation of this business that we believe can unlock Groupon's long term potential. We should not expect that the kind of change we're undertaking here will be even quarter to quarter. Making big changes requires an ability to weather some short term noise and remain focused on the long term. We believe the pieces we've covered today will help us deliver on our vision and the long term potential of the business. We look forward to sharing the details of our progress on future calls. With that, let's take some questions.

[Operator Instructions]. Our first question is from Ross Sandler with Deutsche Bank. Your line is open.

Rich, just a couple questions. It looks like overall things are still pretty stable in North America and EMEA and the trajectory continues to decline in ROW. So, you mentioned that you have 28 countries down from 45. Do you feel like 28 is the right number? Or, are you still in the process of winding down a few of those? And, when do you think international as a whole will be at a point where it can be flat? Or, even grow at some point? Is that quarters or is that still years out? And then, the EMEA segment margin ticked up pretty meaningfully. Can you just give us more color on what was driving that in the quarter? Thank you.

I'll cover the first piece and then I'll hand it over to Brian to talk a little bit more about EMEA segment margins. But, you're right. We've made some fast progress on our restructuring. We're down to 28 countries from 47 which is 17 exits in a very short period of time. That's faster than we expected, but it has us feeling like we're in a pretty good place with our footprint and pretty good place with our overall progress on that front. Though like any good team and any good Company, we're going to continue to evaluate that footprint as we move forward throughout the year and as we continue with the rest of our restructuring efforts which are still ongoing. It wasn't just about challenging our country footprint. It was also about challenging how we work in given markets and in particular, how we're organized and how we're creating operating leverage and actually operational leverage in the teams. So, examples of that are our shared service centers, our Customer Service centers that we're still in the process of centralizing, particularly in EMEA. Moving away from dozens and dozens of separate operations into a handful of shared services so that work will continue. And, through that work, my guess is over the next couple of quarters, we'll learn some things in that process and it may have us go deeper in our evaluation. But, for right now, we're feeling pretty good about that process and as we move into the fall of this year, we should have that core restructuring complete and the businesses moving in a much more stable place.

Ross, how are you? It's Brian. On EMEA margins, we had a combination of things happen. We had goods margins improving by a few hundred basis points year on year offset by a little bit of a reduction - 100 or so basis points in services take rates. So, that led to the improvement overall.

Okay and if I can ask one more. I think, Brian, you mentioned that North America marketing was $61 million in the prepared remarks. If I caught that correctly. So, is that accurate? I guess, is the first question. And then, if so, that number is going up pretty rapidly per the plan, but is there some contra revenue in the prior period that might make that number look like - in terms of the overall marketing mix - might not be growing 80% year on year? So, can you just help us with that? And then, you said you pushed back the payback periods a little bit. When do you expect the billings growth rate to start to pick up commensurate with that marketing spend in North America? Thank you.

Sure. $61 million is the right number for North America and that's our Marketing spend exclusive of any order discounts. So, there's really no contra revenue that's a part of that. The marketing spend for 2016 - we're going to ramp up very quickly. I would look at it as a pro rata increase over the course of the year and we remain looking toward benefits toward the back half of the year. The plan started off good. We started our marketing spend in Q4 and we saw a nice beginning to our program and we're looking forward to it continuing. But, payback still remains focused toward the back half.

Our next question is from Paul Bieber with Bank of America Merrill Lynch. Your line is open.

I think I may have missed it. How should we think about the growth of North America local billings as the year unfolds? I think you may have given some rough qualitative guidance around that. And then, you mentioned in the prepared remarks improving the product experience and the user experience. Perhaps you could give us a quick, high level overview of some of the product priorities for 2016?

Sure. Happy to do it, Paul. As I said in the prepared remarks, we would expect local to continue to stay around its current range and until we're in a place where we're starting to accelerate our active customer growth. If you look at, historically, the local business and the business overall has trended very closely with active customer growth. Last - in Q4, you had active customers growing 8% year-over-year. The local business growing about 7%. And so, we think it's in a stable place with solid fundamentals and those continue to actually improve. If you look at the active deal counts in North America, continuing to make progress there. 350,000 active deals, including 70,000 coupons. And, solid customer growth that was a part of that as well. The 7% thing - just to be clear on that as well. It includes a pretty significant reduction in order discounts. Quarter over quarter, we reduced order discounts by about $9 million and as we said over time over the last couple of calls, the vast majority of our order discount are directed towards local. So, we were able to both reduce order discounts and keep local roughly in line with where it's been in the last quarter or so. We feel pretty good about the fundamentals of the business and where it's tracking. But again, until we really start to drive customer growth forward which is why we're so focused on that as a core initiative of the Company, I wouldn't expect it to materially accelerate. On to the product side, you've heard us talk a lot about product over the last couple of years. I was purposeful in talking about the customer experience because I think that's bigger than product. And, there's, of course, pieces of our product experience that we will focus on, but it extends to the process of finding deals on our site and buying, redeeming and as well as after-sale service which is a big piece of the overall customer experience here. We're going to focus on making progress on those four fronts in the product. So, when I say find - I mean, people need to find what they're looking for when they come on Groupon. That means more supply and more great local inventory, where people want it, as well as a search function that works really well. It also means making some real progress on helping people when they're in a really basic use case - like I'm hungry. The site today is that long list of deals that's much more rooted in our daily deal past than in a marketplace that's trying to serve high frequency use cases. So, you'll see some big changes to the mobile interface, in particular, to help people get to those use cases a lot faster. You'll also see us make some movements on the redemption process. We still, for whatever reason, we still have paper Groupons redeemed an awful lot these days and there's really no reason for it given how strong we're in the mobile space and the technology that we have as well as then on the service front. We do an amazing job when we talk to customers on the phone. Our Customer Service satisfaction levels are very, very high for customers we interact with. But, we still drop too many calls and we need to make some investments on that front to get to a place where we feel like we have world class service. Those are the things to watch for over the course of 2016 as we invest in the customer experience.

One quick follow-up. In North America, how would you characterize - did you see any impact from macro? Or, is it too difficult to parse out?

We had a really strong holiday season in North America. A lot of retail struggled for sure in Q4. We went counter to that trend. We did have a strong Q4. But, if you look at the core of the Groupon brand, it's a brand that's rooted in value and rooted in savings. I think that was really important to our customers during the quarter. They voted with their wallets and ultimately, we ended up with some better-than-expected results.

Our next question is from Heath Terry with Goldman Sachs. Your line is open.

Sorry about that. Just a couple quick questions on some of the numbers in the quarter. The 85-basis-point decline in the local take rate this quarter was the smallest we've seen in the last couple of years. Is it too early to suggest that we're starting to see that stabilize? Or, should we think of this as more of a one-off versus a change in trend? And then, would just generally be interested in the strategic purpose of the goods business as you increasingly focus on local? And, if there's any intent to see that business shift to more of a local-oriented eCommerce model over time?

So, on the take rate, as Rich mentioned we've curtailed order discounts in Q4. If you think about order discounts, roughly $5 million in order discount would translate to roughly 100% in terms of take rates. As we look over the course of 2016, we're certainly looking at order discounts as a component. We will vary the mix as we experiment with what the right way to think about the combination of order discounts and other incentives that we have. So, you can expect to see it move, but the band that it's in - say between 33% to 34% and 36% is a good range over the near term and we expect that to play out during 2016.

With respect to the shopping business, we do - local is our core. It's just you can look at it in simple terms in gross profit. It's $1 billion out of our $1.4 billion or so in gross profit so it's where the business is focused. It's part of why we've been focused on getting the shopping business - shopping margins into a healthier place. I think you saw us start to execute well against that initiative in Q4 and that will continue to be for 2016 the real core focus of the shopping business. Continue to drive margins in the right direction and continue to drive gross profit dollar growth from that business. Longer term, I've said this a bunch in the last couple of quarters. I believe it. If you look at Main Street U.S.A and pretty much Main Street anywhere around the world, the vast majority of merchants on Main Street are retailers. Those retailers continue to be, I believe, underserved in eCommerce and I think Groupon is really well positioned long term to be able to provide a valuable local eCommerce solution. A local retailing solution for those retailers much in the same way that we do for restaurants and spas and salons and ticketed events, locations and venues. So, I think that's a potential for us long term. I think the work that we're doing now isn't in conflict with that at all. Our customers love our shopping business. They love the goods business. And, you can see that in, obviously, in our Q4 results. So, we're going to continue to do that work to get that business in a healthier place while we continue to test some more local retail. Which we've actually done - we did it toward the end of Q4. We saw some interesting results and you'll see us continue to test into that in small ways to see how much of the appetite and what would need to be done over the next few years to enable that business at a bigger scale.

Our next question is from Thomas Forte with Brean Capital. Your line is open.

Two questions, one, from an inventory standpoint, what should we think of as your most important initiatives to drive inventory? Market-rate inventory or the things you're doing with pages or your mobile efforts? And then, number two, as you advance your restaurant delivery efforts, is this helping you work with restaurants? Are you finding that it's driving the number of restaurants who want to do daily deals with you as well in addition to your delivery offering? Thanks.

You know on the inventory side, I'd say our single, biggest near term initiative - the one that we believe will have the most impact to the quality inventory that we have in the platform and the specific kinds of demand-based inventory that we pull on. Meaning, getting the right stuff in the right locations will largely come out of initiatives that we just announced earlier today which is verticalizing our sales approach in the North American business at least to start. So, we've created teams now around the high frequency use cases and verticals that we work in. So, you have a dedicated food and drink team, a dedicated health and beauty team, a dedicated activities and things to do team, et cetera. We've been testing that approach for the last couple of months and we've seen significant productivity gains and significant quality gains out of that approach. So, working through that, we believe will help us get deeply embedded into each of those verticals. Secondarily, outside of the vertical approach, we still think there's a lot of potential in our third-party inventory program that we've recently launched. We've started to pull third-party inventory on to the site and we're very early in that process. There's a lot of other inventory out in the market that's looking for the demand and the kind of demand that we have on our platform. Those are the couple of big ones that I'd point out to watch over the course of the year. And, absolutely, those two things will play a big piece of improving the customer experience and helping people find what they're looking for when they come to Groupon. The delivery efforts - it is actually a part of our food and drink team. That is actually an integrated team. We fully integrated that group in Q4 and it's a little too early to tell on how the transition from deal to delivery and take out will go. But, something we will keep you updated on. We're more focused on just having that team continue to deliver what we believe is one of the leading experience - if not the leading experience in that market space with the order of product and team that we acquired a little bit later last year. It's a product that continues to show that it can win where we play and we want to make sure that they build a great play book that we can continue to scale over the course of this year and likely over the course of the next few years. That's our top focus, but we'll keep you updated if we find some real inventory leverage across those two businesses.

Our next question is from Mark Mahaney with RBC Capital Markets. Your line is open.

It's Jim Shaughnessy filling in for Mark today. Two quick questions circling back to the marketing spend in 2016. First, if we could get a little more context or color around the different media types that you expect to deploy that marketing spend in? And then, second, as a follow-up - I know the vast majority of that marketing spend is earmarked for the U.S. and North America market today, but have you given - or where are you in the planning process in terms of deploying similar marketing dollars or strategy to some of the international markets? Thanks.

So, Jim, how are you? It's Brian? Let me start off and just give a little bit of color, then Rich can chime in with some specifics. The media that we're planning on spending will be across all channels. We're looking at both our online spend and our off-line spend. We've already started, for example, with some radio ads here in Chicago. I would look for, as I talked about a little bit before, the phasing for us to kick that off pretty much is a pro rata increase throughout the year.

Yes and on opportunities more broadly and just thinking about spend outside of the U.S. - our number one focus remains investing in North America and the North American customer growth. But, as we said in the last call, we have some great businesses outside of the U.S.. We have businesses like the UK and France and Germany and Italy as a few examples of businesses that are winning in their markets and performing well and they have good, solid marketplace fundamentals. We will continue to apply the learnings from North America in those spaces where we see the opportunity to accelerate growth there. But, for at least the first few quarters, we're going to be very much focused on the North American business and expanding across all of those different categories of spend and channels that Brian covered because there's a lot of ground to cover there. We saw obviously early progress and results, but the team needs to continue to make some real structured bets in North America before we start getting ahead of ourselves and moving in the international space.

Our next question is from Tom White with Macquarie. Your line is open.

Just one housekeeping, one on guidance and then something about deal density. Just on the guidance, have there been any changes to your FX assumptions in terms of 2016 impact to revenues since you last gave guidance? And then, just on deal density, you talk about wanting to drive day-in and day-out habitual usage. Your aggregate deal count continues to go up, but how should we - how do you think about the optimal level of deals? Or, appropriate deal density in a given urban market? What is that threshold or tipping point that you are now aiming for? Is it certain number of deals per square mile or per city block? Just maybe a bit more color about how you think about that? And then, maybe the role of the third-party stuff to achieve that? Thanks.

On the FX assumption, we based our guidance based on the current FX rates today.

How we think about inventory health, I think this is a space that's evolving for us and evolving pretty fast, Tom. I probably would have given you a different answer six months ago than I would now and a lot of that has been shaped by our move in the vertical space and really getting vertical teams to invest deeply category by category. And so, that's really not how we think about inventory health is really at a category - and that goes down to a service level. There's not a simple thing that I can tell you about deals per square mile, as an example, because in a really high - a really high level, you'll drive a long way to go get laser eye surgery. You won't go very far to grab lunch. So, each team, each vertical has a view of inventory health and we're now working against that verticalized, category level view of inventory health. That's both as primary sourcer of inventory where our sales teams are going out and directing the market and where we see opportunity to increase density with a third party like we've done in a place like Chicago with pulling on third-party food and drink inventory. They will do it, but it's really being driven at a category level which I think is the right level to drive local. Local doesn't happen in big aggregates. Local is about neighborhoods and if that's the other thing that has changed more than anything else over the last six months or so of really focusing in on supply health and inventory is that we're focused in on neighborhoods, not just cities. Cities are much too big. It's not how customers really view their local world and we're as we move to verticals we've also started to become much more adaptive to the neighborhood environment.

Our next question is from Blake Harper with Topeka Capital Markets. Your line is open.

Given in the past, your predecessor had, Rich, some trends that had given you confidence you could hit 10%-plus growth in the local segment just based on the number of deals outstanding and some other factors. Just want to see if you could give us an update on some of those there and how you think that impacts the local growth? And then, second question I had was just on OrderUp. Just wanted to ask you more about both sides of those marketplaces and what you've been able to see as far as signing up restaurants and attracting customers? And, how that has grown since you have acquired the business. Thanks.

Sure. So, just I'll take the OrderUp piece first just so we can knock that out. I think that business, as I said, we're really happy with its progress and its trajectory. It's in the markets we're in, especially in the Markets we're in that are more mature. We're doing really well in those markets and if anything, we think we're winning in those markets. Just using an example, it's out of the more mature - one of the most mature mid-city markets that we have for OrderUp. Our takeout and delivery business in that market is now larger than our food and drink deals business in that market and it's growing even faster. So, we think that market, the business has great potential and the product is working well for our customers. We can see that in how customers are responding to it and how the business overall is growing. So, I think from our point of view, we see opportunity to continue to grow that business and to grow that footprint. We're going to be thoughtful about how we do that. We know more than most what it means to expand too fast which you've seen as we started to focus on our footprint overall. So, we're going to be methodical with how we expand that business and we'll continue to update you as we continue to scale it. Now, on local growth, I'll give you the high level and see if Brian has some more color. But, the core things about local that have given us confidence in the past about its ability to grow and continue to move forward are in place today and a lot of that is we're making progress on the core inputs to local. That's things like deal counts and deal density. I said our active deals are up almost double year on year globally so we're moving in a great direction in terms of active deal count. Search behavior continues to improve every quarter. We have more and more transactions coming from search and we continue to have customer spending at a healthy level and a consistent level. So, we feel all of the basic inputs are there ex the piece that will really drive acceleration of that business over time which is accelerated customer growth which is why we're focused on continuing to grow our customer base and accelerating and increasing our marketing investments over time. But, all those core pieces are in place.

From a growth perspective, let me add that as you saw us in Q4 - trying to target a specific 10% is great. But, I think we also have to stay focused on the gross profit side of it. We'll look at order discounts as a component of it and it's profitable growth not just growth for growth's sake. So, as Rich mentioned, we'll expect that local growth will trend around active customers and we'll monitor that throughout the course of the year.

Our next question is from Douglas Anmuth with JPMorgan. Your line is open.

This is Cory Carpenter from Doug's team. Thanks for taking my question. I think you mentioned on the last call an expectation for North America billings growth to reach about 20% in 2018. Maybe just in relation to your comment on local growth staying near 7% in the near term and now that you've had one quarter of the strategic changes under your belt, do you see anything this quarter that gives you more or less confidence in achieving this number? Or, maybe just your latest thoughts there? Thank you.

We haven't seen anything in the last quarter that would shake our confidence in our ability to hit that number and I mean a big piece of that number is of course accelerating customer growth. We saw that growth - we saw customers accelerate in Q4. In Q3, I think we added about 300,000 customers in North America - 320,000 or so and we just about doubled that moving into Q4 which is counter-trend. As you look at 2014, we actually went down in customer - active customer growth from Q3 to Q4 and a big piece of that is of course investing more in marketing. We're seeing the signals move in the right way on that front. And, more importantly, besides just spending and seeing the customer count go up, we're seeing the quality of those customer cohorts trending exactly how we want them to trend. Actually the customers we acquired in Q4. They are actually spending anywhere between 200 and 500 basis points versus their prior-year peer group. So, we're acquiring not only more customers, but we've acquired quality customers as we've gone on. Now, of course, the challenge is how we do that on an even bigger scale in 2016. That's where the team is focused now, but we have good confidence moving into 2016 that we can continue on the path that we need to be on in order to deliver the kind of results that will end up in 20% local growth as we exit 2018.

Our next question is from Brian Fitzgerald with Jefferies. Your line is open.

Maybe one question on one particular high frequency service category. It's the local transactions, the delivery businesses, it's fragmented, it's a competitive space. There are many players there that are attacking different markets on a global basis. What's the most important lever there? Is it already leveraging established relationships with those restaurants? Is it having an all-encompassing platform where they can take part in advertising and listing deals? Or, is it maybe just having more competitive rates? How do you think about that?

Yes, I mean first and foremost, I think there's a few pieces there. But, first and foremost, you have to have a great product. You have to be able to deliver a great customer experience and we feel really good about the product that we have. You can see that in the markets we're in where we aren't just competing - we're competing at the very front if not winning in the markets that we've actually had some time to get the product up and running. So, we feel good about that, but have you to have a great product. I think for restaurants, they want to see platforms with real demand. And, as we looked at the space and thought about our entry, we of course said - you know, look, food and drink is a big piece of our big local business today. It's something that customers do every day multiple times a day. To win in local, we need to have a great food and drink offering and we think that includes having a great delivery and take out offering. So, that's one thing. It's great to have a strategic lever there that makes sense, but as we looked at our entry into it specifically outside of it making sense, we said well we have something that most people in this space don't have which is significant customer volume. With 26 million customers in North America, we're significantly ahead in that. I think that's exciting for our restaurant partners to be able to tap into that kind of demand pool over time. And, I think that's going to give us a specific leg-up as we move over time there. That's, as we know, a very hard thing for others to build. It's very expensive and we feel good about our positioning on that front.

We do have time for one more question. Our last question will be from Dean Prissman from Morgan Stanley.

This is John Lanterman on for Dean. Just a qualifying question on your North America local growth. We saw some disclosures in your Press Release. Does that include OrderUp for the quarter? Is that in North American local? And, if it is, can you share any impact it has had on growth rates? Thanks.

It does include OrderUp and I would look at it as basically adding about 100 basis points.

To billings?

Yes.

Thank you. I'm not showing any further questions so this does conclude the program. Everyone, you may disconnect and everyone, have a great day.