Good day, everyone, and welcome to Groupon's Second Quarter 2018 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. Today's conference call is being recorded. For opening remarks, I would like to turn the call over to Vice President of Investor Relations, Heather Davis. When you’re ready, please go ahead.

Good morning and welcome to Groupon's second quarter 2018 financial results conference call. On the call today are our CEO, Rich Williams and CFO, Mike Randolfi. The following discussion and responses to your questions reflect management's view as of today, August 3, 2018, 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 and Form 10-Q. We encourage investors to use our Investor Relations website at investor.groupon.com as a way of easily finding information about the company. Groupon promptly makes available on this website the reports that the company files or furnishes with the SEC, corporate governance information, and select press releases and social media postings. On the call today, we will also discuss the following non-GAAP financial measures: adjusted EBITDA, FX-neutral results and free cash flow. 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. As we discuss our results during this call, note that all comparisons, unless otherwise stated, refer to year-over-year growth as reported, and all gross profit comparisons are FX-neutral with the exception of gross profit per customer, which are as reported. And with that, I'm happy to turn the call over to Rich.

Thank you, Heather. In the second quarter, Groupon continued strategic progress in our mission to be the daily habit in local commerce, delivered another strong quarter of adjusted EBITDA and improved free cash flow in our core business. As we've attacked the opportunity in local, we’ve remained focused on our four strategic initiatives that we believe are critical to long-term success and shareholder value. As a reminder, our four strategic initiatives are; enhancing the customer experience; establishing Groupon as a true open platform for local; realizing the potential of our international business and last but not least, continued operational rigor. We see these initiatives as essential pieces to extend our advantage in local and more importantly, unlock the true potential in this brand and business. For certain, these are not small undertakings, but we made progress in each area, which help us deliver $56 million of adjusted EBITDA and trailing 12 months free cash flow of $145 million. These are solid results and underscore our ability to deliver on our commitments, while evolving our business and paving the way for an even more exciting future. We’ll pause for a minute on our revolution. The past two plus years have been focused on exactly this idea on building the next bigger, better version of Groupon for merchants, consumers, employees and shareholders. We're by no means done, but we're on our way. The first phase of our evolution, which began at the end of 2015 and ran through the middle of 2017, focused on rightsizing and restructuring the company to position us to fight the right growth battles with a sustainable cost base and improved economic flow-through. International bore the brunt of this effort and a disruption inherent in restructuring actions of its scale. But to be clear, it wasn't all about…

Thanks, Rich. Our second quarter results for gross profit and adjusted EBITDA are in line with what we expected from the last earnings call with gross profit of $324 million and adjusted EBITDA of $56 million. In North America, gross profit was $219 million for the second quarter, down $15 million on a year-over-year basis, which was largely offset by lower marketing spend. Q2 local gross profit was $165 million, down $14 million or 8%. Adjusting for the Groupon+ ramp up and the reduction of gross profit from the sale of certain order of assets, North America local gross profit would have experienced a low single digit percentage decrease. Q2 Goods gross profit was $38 million, increasing $1 million, or 4% over the prior year. In total, gross profit per customer for Q2 on a trailing 12 month basis in North America was $28.36, about flat versus the prior year period. As anticipated, we experienced a decline of active customers in North America, as we've become more efficient in our marketing segmentation and our focus on attracting and retaining customers that we believe have the potential for greater value over time. We expect a similar trend in the next couple of quarters. In summary, for North America while we’ve taken several actions, such as continuing to roll-out Groupon+, optimizing our Goods business and selling certain order of assets, we recognize this has created some short-term disruption which we expect will settle out over the next couple of quarters. At the same time, we expect these actions will have longer term benefits for the business and support increases in gross profit per customer. On International, we’re pleased with Q2s performance and continue to be very excited about the long-term opportunity for this segment. International continued its positive momentum and for the…

Thanks, Mike. The second quarter demonstrated the continued progress we’re making toward long-term success, with our continued focus on an amazing customer experience, extending the strength and effectiveness of our platform, continuing our encouraging progress in International and focusing on operational excellence, we believe our investments will deliver strong returns over time and more immediately, across the second half of 2018. Of course as I always do with thanks to the Groupon team for their commitment to our mission, the customers, the merchants and to our local communities, which continue to drive us forward? Now let’s take some questions.

[Operator Instructions] Our first question comes from a line of Eric Sheridan with UBS. Your line is open.

Thanks so much for taking the question. Maybe going back to slide 12 on the marketing, just wanted to stay on a little bit of what you've learned as you sort of deemphasized and reemphasized certain channels on the marketing side, how you’re tracking against that time to payback 12 months to 18 months, that you’ve talked a fair bit about? And how we should think about dollar spent on marketing, feeding into either user growth or gross profit dollar growth as we look maybe even past 18 long-term? Thanks so much.

Sure, sure. So, you know as we think about marketing, our overall thought and viewpoint around marketing has continued to be that we should be targeting a 12 months to 18 months pay back and we look at that on the margin and that's been our thought for the last couple of years, it continues to be our thought and I would expect that going forward. So, with that one of the things that we’re always aiming to do is improve the analytics, improve the granularity around our investing of marketing dollars, such that you know we have the ability to ensure we're getting as much efficiency out of each marketing dollar deployed. So, what we’ve continued to do particularly over the last year was just be able to develop deeper granularity in our marketing, which has giving us the ability to identify pockets of efficiency as well as pockets of inefficiency. And so where there's pockets of inefficiency we’ll actively make that trade-off of not investing a marginal dollar to either acquire or retain a customer. So, in the short run in North America that obviously is resulting in some modest reduction in net customer counts, but over the long run, we believe that helps us mix into a more valuable mix in terms of gross profit per customer from an overall standpoint so -- and that's kind of the way we're going to think about it is continue to be within a 12 months to 18 months pay back on the margin. Internationally, what I would highlight there is we're early days in International and so that is the market that is deeply, deeply underpenetrated. So, you really see us leading into that acquiring customers, I would expect customer acquisition to continue at a healthy pace. What I…

Yeah, Eric, this is Rich, and just to add a fine point on some things, I want to be clear on it as we continue to refine the programs in marketing as Mike described is that what we're not going to do is just invest marketing dollars to grow the customer count, this doesn’t do anything for us. We're going to invest our marketing dollars to drive gross profit in high quality customers over time and that's the biggest thing that we've improved over the last couple of quarters is our ability to identify that gross profit potential long-term that's what we're going to invest in disproportionately and if that means that we don't invest in either retaining or requiring a customer, it's going to be for the right reasons and that we just don't see the potential for them at this point in time to generate meaningful and reasonable returns within our thresholds.

Thanks so much for the color.

Thanks.

Our next question comes from the line of Tom Champion with Cowen. Your line is open.

Hi, good morning guys. I'm just curious if you could talk a little bit more about the North American gross profit growth and the deterioration in 2Q. I think X order up in Groupon+ growth was up last quarter and maybe just address the trend particularly in local. Maybe how we should think about it through the balance of the year? Is it going to improve just based on lapping order up or is there something else underlying potentially in improving trend? Thank you.

Sure. I would just highlight if you think about our first half of the year and we talked about this going back to our very first call in the year, where there were several things that we were focusing on that, we knew we had the potential to create some degree of short-term disruption and no longer having order up, which we think is the right strategic thing to do because we think it's much better to be partnering with the scale player in that space, focusing on growing and emphasizing Groupon+ although that's a short-term headwind and even on Goods optimizing our Goods business where we trade-off some units for a higher margins and higher gross profit. We realize that has the potential to create some short-term disruption, but what I would indicate is we believe that that disruption is short-term. And I’d point you to the commentary, we gave around the third quarter. And where we talk in the third quarter, I would highlight that in the prepared commentary, North America we highlight we would expect gross profit to be roughly flat year-over-year in the third quarter. And we really don't fully lap order up until you get into the fourth quarter. And we really don't – we'll start to see more of the benefit of Groupon+ as we get to the back part of that quarter into the fourth quarter. So, I think what you see in the third quarter is the beginning of a just year-over-year improvement on a sequential basis.

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

Thanks guys. 5.1 million G+ credit cards linked that's good. Can you remind us what's the TAM there, is it Groupon members of the credit card in G+ locations, how penetrated are we into that? What type of dynamics are you seeing on the adoption rates there? I think it was 1.1 cards added this quarter is 1.5 last. And then how do you think about expanding G+ markets? Thanks.

Great. Thanks for that, Brian. From a TAM perspective, I guess, if you were to think about it just in the U.S. or something around 160 million total cardholders last I saw. But obviously, we’re only in 25 markets to date, so we're working to address a portion of that, but the markets we’re in are the largest markets really in the U.S., so we're going to have access to a really significant number of cardholders is our TAM. You start to expand that to our countries and international where G+ longer term has opportunity. You're talking about hundreds of millions of cardholder’s total. So, I would see with 5 million cards enrolled we're very early in the game even within our existing customer base. And I think that's really where we started is with our existing customer base, but I wouldn't limit the potential of the product to just what Groupon currently has because even in a place like the U.S., you know call it we're somewhere in the 10% to 12% range penetrated into the addressable market overall for consumers in the U.S. So, I think we've got a lot of room to go there. As you mentioned, I think actually adding north of 1 million in cards enrolled Q1 and Q2 is really solid overall and has been in line and in general with where we've been over the last couple of quarters in velocity of adding cards to the program. And increasingly for us what we're focusing on, disproportionately is really making sure that the Groupon+ experience overall is what it needs to be throughout the funnel. So, when we started obviously we were very focused on getting cards enrolled in the program, very focused on getting initial merchant penetration into the program. Now as we have those moving into a much healthier zone, we actually have some real scale to play with and learn from. We’re going to be working more and and more deploy across the funnel from enrollment all the way down to redemption. So, it's not going to be a singular and focused for us as it's been over the last three or four quarters on just enrollments, we’re going to be much more acutely tuned to making sure that we're getting people to not just enroll their cards and really deeply engage in the product, start using it much more frequently as we know they have the potential to do and then continue to scale it up from there. But I think really you have to look at the total cardholder universe in a country like the U.S. and in the major countries that we operate in in Europe is the real way to think about the TAM.

Great. Thanks Rich.

Thanks, Brian.

Our next question comes from Scott McConnell with D. A. Davidson. Your line is open.

Hi, thanks. So, first on the IBM case; what will be the ongoing effects of the decision going forward if it stands and you know what Groupon have to pay, things for licensing fee on a go forward basis?

Yeah, so what I would just highlight there is we continue to believe, we didn't – and we don't infringe on the patents at issue and we fully intend to fight the verdict and overturn it and reduce the damages through post-trial motions and appeal, so, that's our view. You know beyond that I wouldn't comment that I would just refer you to our 10-Q.

Okay, great. Second question would be Google recently changed their algorithm to place a greater emphasis on mobile. So, you’ve long had a strong mobile product, what has the change in algorithm done to your SEO efforts?

Thanks for that Scott, I’d say in general anything that biases toward mobile, we like long-term, your point is exactly right. We’ve had a strong mobile presence, we continue to have a strong mobile presence and that's really the only place we focus our product development efforts these days. So, again I think that benefits us in the long-term with any recent changes on the Google side, we haven't seen a material difference outside of our just ongoing optimization and improvement that we see just day-to-day in our business, so I think there’s not much besides our continued confidence in our mobile footprint that I can share with you at this point.

Great. Thanks.

Thanks, Scott.

Our next question comes from the line of Justin Patterson with Raymond James. Your line is open.

Great. Thanks so much. Rich, I wanted to touch on your earlier comments around investing in a new mobile experience and tease out some of your thoughts there. Actually think about the size and duration of this investment. What's your hypothesis on how this should effect conversion rate and billing over time? And then related to that, I would love to think about how you’re focused on search and discovery there, especially with full price inventory since. I find a common question of investors is just really wondering how your – where is the value-added is not that full price sides and things like Live Nation and LV are very well distributed elsewhere. Is there something you're doing with that audience, with your data that's increasing velocity of those sales for that customer base? Thanks so much.

Thanks, Justin, so great question and so I’ll start with the mobile experience and really I think just a Groupon experience overall and how we’re thinking about that. And I think as adaptive we've been in mobile development and I think I mentioned it was the sixth highest rated iOS app of all time. So, we’re very good at creating, engaging mobile apps and really making an easy to use and rewarding app. I think though what I’d say is that the vast majority of our efforts have been around designing a really rewarding and high quality app experience around the first generation Groupon product and as good as our app is, based on our customer feedback, it's really been a refinement of that list in feed of deals and really taking that daily deal view of things and making it increasingly easier to sort and filter and all that sort of stuff. But the fundamentals of that product experience have remained largely intact. I think our hypothesis is as we continue to add catalog scale that experience isn’t built for it. It's not built for hundreds and hundreds and hundreds and hundreds of thousands of offers or even millions of offers being deployed to a customer and in a way that that enables rapid he can types of experiences that other large scale market places would be catalogs employ. And so you just look at any of the other major scaled marketplaces and they're much more geared towards search and discovery or he can find high intent behavior. Ours is really have been dealt and biased towards effectively window shopping and really impulse more than it really enabling that high intent he can find type of traffic. And we have a lot of that traffic in our – you…

Great. Thank you, Rich.

Thanks, Justin.

Our next question comes from the line is Deepak Mathivanan with Barclays. Your line is open.

Hey guys, thanks for taking the question. I know it's early, but can you provide a high level framework to think about it FY 2019 EBITDA. Should we expect trends in gross profit growth and marketing spend to be similar to current levels as we look into next year. Looking at the cost structure, do you see more opportunities for sort of operating efficiency gains in your models. Thank you.

Yeah, so we haven’t – we’ve obviously only provided guidance through the end of this year, Deepak. So, what I would say as I think just longer term, what are some of the longer term trends that I just see. One is, as we talk about we believe we're on a path to multi-year adjusted EBITDA and free cash flow growth. And what I would say is, is I expect over time that's going to be comprised of growing gross profit in North America and International. And at the same time, I think that while we will have investments from an SG&A standpoint, we will make those investments where we think there's good pay off on those investments. We have a strong mindset that we've developed over the last couple of years to continually be looking to drive for efficiency. So, we’ll work to offset as much of those investments over time. But what I would highlight today is we reiterated our guidance of $280 million to $290 million. But we also provided a little bit more commentary around free cash flow generation. What we highlighted that we would expect for this year to generate around $200 million of free cash flow ex any potential impact from IBM. And I think that just highlights the flow-through and the potential flow-through in years to come -- grows for the potential of free cash flow of this business to grow.

Right, that's helpful. Thank you.

Thanks, Deepak.

Our next question comes from the line of Matthew Trusz with Gabelli and Company. Your line is open.

Good morning and thanks for taking my question. Just talk about attrition, how do you feel about the health of your customer base today? How much would you characterize as lower value that you wouldn't mind seeing turn off? As they turn off, can you just discuss the level of rise in gross profit for customer that you're expecting is possible? Thanks.

Yeah, so I’ll start and so you know, the way we think about it, it's pretty mathematical. It's pretty much, what do you spend to acquire or retain a customer relative to the downstream gross profit. So, if we're investing in incremental dollar, we want to obviously make sure, we're getting the return on that incremental dollar. In North America, what I would say is, I think, one, if you look at the trailing 12 month basis, gross profit per customer was roughly flat year-over-year year. But I also look at going forward that's flat before you fully have the benefit of all the partnerships and third party supply that we've been continuing to add and are now just starting to implement that's flat before we -- as we've been you know making some trade-offs on Groupon+ that we think has some long-term benefits to us. That's been flat despite our continued refinements of brand and just overall supply. So, I think all of those have the potential over time to increase gross profit per customer in North America. I think if you look at kind of a just overall commentary for both North American and International we have talked about throughout the last couple of calls, the expectation that trends will continue to build as the year progresses. And so, I would expect that you continue to see that benefit in gross profit per customer. I’d also just highlight on International. Over trailing 12 month basis, we saw International gross profit per customer increase by 10% year-over-year and we still have a lot of opportunity, where we're applying elements of the North America playbook, whether it’d be product, supply and marketing analytics. We think that has a potential for years to come on to both, not only grow gross profit per customer, but also materially and significantly increase the customer base.

Yeah, the only thing I’d add on there, Matt, is that where we've seen and where we’ve talked about in general some headwinds and business [indiscernible], once where we've made strategic decisions to impose them where we're rolling out new products that we believe and we've seen the indicators of potential on to really change the trajectory of customer scale and growth on the platform. So, those are the things like the trade-offs, associated with Groupon+ and that inherently has some near term headwinds as we trade-off some voucher sales. So, I think within that you see – to my point, a total GP per customer, that's growing overall. On even – and the total basis, our total customer count is up about a million customer’s year-over-year. So, I think we're in a pretty solid spot and with what we believe is significant opportunity to make it better over time, especially as we start to see the effects of some of these new products rollout, we’re doing product rollout kick in over time. So, I think we're well positioned to continue to grow. I think the core message here though is what we're -- the metric we're not as focused on is the specific customer count, given the size of the TAM and trajectory that we're demonstrating, we can push on the GP per customer side. It's really about refinement and focus and getting products scaled as fast as we can and tapping into the opportunity in a measured and thoughtful way, more than just driving an optical metric that really doesn't drive the business.

Great. Thanks. Just a quick follow-up, there was recent media speculation about your potential interest in selling the company. Is there anything you can comment on as far as your position strategically? Is the company for sale? Thanks.

So, Matt, what I’ll tell you on that front is, look we’re – I think we’re doing some really exciting things in the company and we're expanding our partnerships and at a pace that’s I think really, really encouraging. We're delivering solid adjusted EBITDA and free cash flow growth in a space that if you look at our guide – where the top-end of our guide on adjusted is 16% year-over-year growth and our free cash flow is something north of 150% year-on-year for my commentary. So, it's not surprising that we’ve received some expressions of interest on that side as we have from time-to-time in the past. And our board always takes that very, very seriously, but outside of that, we don't really have anything to comment on.

Great. Thanks so much.

Thanks, Matt.

Our next question comes from the line of Chris Merwin with Goldman Sachs. Your line is open.

Okay. Thank you. Just a couple of questions. First, is there a material difference in the average ticket size for a Groupon+ as compared to a traditional Groupon? And if so, has that caused some of the headwinds that you're seeing as you navigate the transition towards Groupon+. I guess, as related question, are you seeing the same frequency increases for Groupon+ customers today that you initially did, when you were testing the product? Thanks.

Thanks for that Chris, I’ll start and Mike, if you have color, feel free. But there is a difference in ticket size for G+ versus vouchers, but only when you look at it in aggregate and only as an -- really as an output of our decision to bring different types of merchants on via Groupon+ first. So, the example, just to put a finer point on it, the traditional Groupon voucher product is geared more toward, casual dining to fine dining, where you have a much higher average ticket prices. But the voucher product hasn’t been as addressable to breakfast, lunch, coffee et cetera, so we made a choice and when we rolled -- when we started to roll-out Groupon+ and we continue to make that choice as we’ve scaled the inventory to bring on more lower ticket price merchants. So, inherently you're going to have some of that dynamic happening and nearly that is a piece of that headwind as we look to bring high frequency, lower ticket price merchant on in the platform disproportionately at this stage. Now Groupon+ works well for high ticket price merchants, but we've now decided to make that really the focal point of the product because again we're building for more habitual use, higher frequency and really engraining the behavior to use Groupon to save money on food every single day. So, it's been a strategic decision to do that, but when we do have a product, when we do have Groupon+ class and the voucher running at the same merchant you don't really see a material difference at this point, we haven't observed a material difference in total ticket price.

The only thing I would also add there in terms of what creates the headwind that you see is, over the last six months and even going on a little bit in the third quarter. Essentially what we have been doing is is encouraging enrollments using site and app assets and encouraging claims, and then ultimately encouraging redemptions. But as you would encourage an enrollment, as our encourage a claim and use site assets, while you're doing that, you're trading off what would have been a traditional voucher purchase, where you would have earned GP and you would have generated a unit at that moment. So, what happens is, as the – what we expect as the year progresses is we will start to get the benefit of that ramp up and redemptions and you don't necessarily have more impression that you used to support Groupon+. So, one of the things we've talked about in our commentary all along is we have expected this disruption in the first half of the year and we would expect that it's going to continue to build and we'll start seeing the benefits in the back half of the year of Groupon+ and that will -- you'll see that in terms of our overall GP generation and our GP per customer generation over time.

Yeah, Chris and a big piece of that build is that we do to answer your second part of your question. We do continue to see the same kind of repeat purchase frequency behavior from those Groupon+ adopters and we're getting in this later stage, in these more recent period as we did in the beginning. So, net when you start to redeem on Groupon+ your purchase frequency and redemption frequency Groupon+ continues at a very high rate and much higher than our traditional voucher business.

Okay. Thank you.

Thanks, Chris.

[Operator Instructions] Our next question comes from the Sameet Sinha with B. Riley FBR. Your line is open. Sameet Sinha, your line is now open. Due to no response we will now conclude the call. I'm not showing any further questions at this time. Ladies and gentleman, this does conclude today's question-and-answer session. Thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.