Good day, everyone, and welcome to Groupon's Second Quarter 2019 Financial Results Conference Call. [Operator Instructions] Today's conference call is being recorded. For opening remarks, I would like to turn the call over to the Vice President of Investor Relations, Heather Davis. Please go ahead.

Good morning, and welcome to Groupon's second quarter 2019 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 views as of today, July 31, 2019 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 our press release and in our filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2018 and subsequent quarterly reports on 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, our quarterly stockholder letter and select press releases and social media postings. On the call today, we will also discuss the following non-GAAP financial measures: adjusted EBITDA and 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 the non-GAAP measures, including reconciliation of these measures to the most comparable measures under U.S. GAAP. All references to SG&A in 2018 exclude the charges for the IBM patent litigation. As we discuss our results during this call, note that all comparisons, unless otherwise stated, refer to year-over-year growth as reported. 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.

Thanks Heather. And thanks to everyone for joining our quarterly conference call. We look forward to discussing our results and taking your questions. Hopefully, everyone has had the opportunity to read our quarterly letter to stockholders, which we posted yesterday on our Investor Relations site. It contains a discussion of our second quarter results, as well as our updates on our 2019 strategic initiatives. With that, I'll hand the call over to Mike for some additional color, and then we'll take questions.

Thanks Rich. In the second quarter, we generated gross profit of $292 million and adjusted EBITDA of $47 million while supporting our strategic initiatives focused on card linking, bookability, mobile experience and building out our distribution platform. In North America, gross profit was a $199 million down $21 million or 9% year-over-year. Q2 North America local gross profit was $158 million down $8 million or 5%. Q2 North America goods gross profit was $28 million down $10 million or 26% driven by fewer North American customers, lower traffic and shifting impressions to support our strategic initiatives. We’re seeing the benefits of improved segmentation with gross profit per customer for Q2 on a trailing 12-month basis in North America of $30.05 up 6% versus the prior year period. In Q2, North America net customers declined by 1 million which reflects the continued optimization of marketing spend toward customers that have higher potential for long-term gross profit generation and ongoing traffic headwinds including email and SEO. Turning to international, gross profit was $94 million down $5 million or 5%. Q2 international local gross profit was $66 million up $2 million or 3%. International goods gross profit was $20 million down $6 million or 22% resulting from a continued cost consumer in Europe especially in the U.K. coupled with intensifying competition in our home and garden category. In response, we continue to invest in our value proposition through price which is driving better unit trends in the region albeit at the expense of near-term goods gross profit. International customers increased slightly in the second quarter. Q2 gross profit per international customer on a trailing 12-month basis was $23.37 down 7% as reported and 3% on an FX-neutral basis. This decline was driven by lower gross profit in goods. In the second quarter on…

[Operator Instructions] Our first question comes from the line of Tom Champion from Cowen. Your line is open.

Mike, I’m just curious if you could talk a little bit more about the drivers North American gross margins, looks like a fairly substantial pullback in goods might have been a driver but just anything else you could point to? And then maybe also just any updated thoughts on customer trends in North America and getting that trajectory towards stability by the end of year. Thank you.

Sure. So yes, few things. On gross margin I mean, we’ll continue to see nice improvement in North America as you’ve noted in gross margin and it's entirely on the local side and there's really two elements there. First, we continue the surface to customers that which is most appealing and interesting to them, but also that which we believe we’re going to earn the most GP on and so our algorithms are naturally continuing to get increasingly refined over time and that gets reflected in the overall - in the overall margin. The second thing is we continue to see as we've seen in the last year an increased mix shift towards health and beauty and particularly in the higher end health and beauty space. So think about things like cosmetic procedures, Lasik procedures, high-end dental, those are areas where we continue to build out really nice supply and that supply performs really well on our site, on our - with our demographic and so those tend to be higher margin categories and they've done really well for us. So those are the two drivers with regard to margin. On the customer side, what I would say is we’ve talked about this over the last few quarters. Our expectation through this year is that the trends you're seeing in customers will be the trends you continue to see through this year. And as we've talked about, we continue to become increasingly granular and segmented with regards to who we market to, how we market to, how much we spend and to ensure we’re getting a 12 to 18 month payback. And so the trends you're seeing, in the second quarter or the ones I would expect in the third or fourth quarter. Now what we've also talked about is as we've looked at how those customers and what the trends are as we go into 2020, and we look at as we cycled out of some of the lower value customers coupled with a lot of our initiatives which are targeted to continue to drive engagement amongst our higher value customers, our expectation is that the customer trends that you're seeing now will moderate in 2020 and that's been consistent with the commentary that we have provided in the last couple of calls.

The next question comes from the line of the Ygal Arounian from Wedbush Securities. Your line is open. Q – YgalArounian: Thanks for taking question. I'll ask one and a follow up. So I wanted to seek to clarify that parsing through the volume a little bit. The total is down 12%, and U.S. was down 18% and international slight. So first, what’s driving the disparity there? And then as we’re trying to understand success of the card linked in bachelor's initiatives in becoming more of an everyday local discovery platform, so I am going to understand how to break out what’s in the volume looks like in local versus goods maybe as much details you are willing to share, obviously customers are declining right now for volume declining faster. So just help us think through kind of the puts and takes there?

Sure. So going out discussing units. So there’s a few things there that I would just highlight and I’ll talk about international and North America separately. On the international side, we don't typically break out local versus goods but what I would say is Billings is a pretty good proxy and what you could tell from that in international is that international units on the local side were actually growing in the last quarter, offset by, partially offset by some declines on the international goods side. And essentially on the - what was on the international goods is, we continue to see particularly softer consumer. There's a lot of indications that consumer confidence is trended on the lower side over the last couple quarters, actually the lowest it's been in five years in the U.K. that coupled with what we see is increased competition and highly fragmented market, particularly in the home and garden category which is popular this time a year. So that’s what’s driving some of the declines on international goods. Where were supposed focus what we view is most strategic on international, local, we continue to see growth. On North America, similarly if you look at our unit breakout and using Billings as a proxy, you could see North America local billings down 8%, North America goods down 25%.You could see that the unit impact is going to be greatest on the good side. And let me just break that out a little bit for you. Keep in mind of the 25%, almost half of that is attributable to the fact that we have fewer customers this year than last year. About a quarter of it is attributable to us utilizing impression, specifically from goods to support strategic initiatives and is specifically targeted towards the lean into…

First part and I’m sure Rich will add additional commentary on this. So on the conversion path, but first before I get into that let me just talk about one of the reasons why we've been pushing this over the last quarter or two is this was something that we started testing early last year and I would say is it's still early days. But what I would also say based on our indicators that we've seen so far, the consumer behavior when someone enrolls and select is really, really positive. We're seeing meaningful step ups in purchase frequency, meaningful step ups in the average order value and a greater propensity to search, so we're really, really pleased and excited about that. And with that, the way the - if you think about the economics you're right. It is a great consumer proposition and that's the intent and that's by design. If you think about the math of Groupon Select, we essentially are charging a fee of 499 a month, so we will get somewhere between $55-$60 per customer in gross profit per year. As part of the Select program, you're right that we provide meaningful discounts on a given transaction. There's two things to take into account on that discount per transaction. First, in almost all cases the discounts still is below - is at or below the current take rate. For example, if you look at local, you look at our current take rate of 32%, 32%, 33%, the discount is 25%, so we’re still earning money on the individual transaction and the other thing I would say with regard to the order discounts is keep in mind, we have many of our transactions today where we already are providing an order discounts. So the incremental, the discount, the order discount that we provide and select at 25% is an always a true incremental 25% relative to what consumers get today. But the way I would think about it is a select customers should own us at least $55 to $60 of gross profit on a per customer basis, if not more, which is almost double the average gross profit per customer that we generate today. So with that we will continue to lean into it. Why it affects - why it affects conversion is, we need to encourage enrollment as people come through the purchase path we highlight to them the additional savings they could generate through Select and we offered as an option. And then we try to encourage them to enroll as you're getting ready to purchase. Anytime you add a step in the purchase path process that increases a degree of friction and any time you do that you end up reducing conversion to some degree. In this instance, we think it really makes sense because every customer enrolling we have the potential to earn double the GP per customer as our average customer and so that's why we lean into it.

Yes, I think that’s right. Just to speak a little bit about the philosophy where we are now, you asked whether we’re thinking about it is a way to subsidize growth on frequency. It's really, that’s not really how we're thinking about. I think ultimately we’re looking for a way to monetize what is historically been member like behavior in our customer base. So we've had that member like behavior for years but we haven't had a member like monetization model to go along with it. We saw an opportunity to do that and to build that and really we set a philosophy for the program out of the gate to make it as incredibly compelling as we could, really to drive engagement and frequency and commitment to the platform and to Groupon over time, more so than thinking about in a way is something to growth and I think hopefully now as you've heard Mike walk through this the economics of the program, see there’s really - there's not a “subsidy there ” more so than it is just making the Groupon value prop even more compelling and our goal pushing forward is to double down on what you mentioned now, which I think - it is compelling today. But as we as we bring more features in, more partners in and more unique experiences in we think we have a program that starts to get into the no-brainer territory, the why, would new territory but ultimately over time can support higher membership fees. But today our focus is entirely gain traction in the program, gain trial in the program, get as many of our customers into the Select experience, as we possibly can, so that we can continue to add value, share the economics with them and build this healthier relationships over time.

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

Two questions. So first, Rich, on the Select program once again, it seems like the early days, the adoption is pretty good for the program, where do you think it can reach in terms of penetration say in the next two to three years on the impact from impressions you know allocated to Select, are you concerned that this will moderate sort of after 3Q and 4Q or is it a more kind of like a long process on a more stable run rate?

Thanks, Deepak. It is early days and it's hard to tell at this point what we think the upper bounds can be an over the next couple years, but we look at them in much the same way as we think about Groupon overall. I mean, the core of the program is savings on the services that most consumers spend on every single day, so I don't think we’re constrained by domain or by and I think we have a big audience that's addressable here, but we need to continue to refine the program, can really refine our marketing tactics to and send trial, etcetera. I think over the next couple of quarters we will have a better feel for what the next few years will look like, but we do needed to really continue to invest and scale to start to get some of that knowledge base builds over the coming quarters. As far as impacts and impressions, Mike you have a perspective on that.

Sure. I think there’s two things. I would say first, as we've included it in the purchase path, we will continue to refine that and what you'd expect is over the coming months we will identify how to continue to have that be represented in the purchase path while reducing the negative impact, probably always some negative impact from being in the purchase path. The second thing is if you just - you think about the math, people paying $5 a month,$499 a month and how quickly just a small number of members can drive fees, you could very quickly see that the fee benefit you generate, which we see ramping into the fourth quarter can quickly mitigate or if not quickly overcome any detriment that you have from that initial conversion path hit by your getting people enrolled. So what we see going to the fourth quarter is we will continue to - we expect to continue to get better in terms of what’s presented in the purchase path but more importantly, we expect fee revenue from the program to be ramping up going from the third quarter, fourth quarter.

And one other thing that I’ll add here Deepak is we’re like everybody else in the online space, we spent years refining our checkout process and as Mike mentioned earlier, anytime you add something new, especially an extra step to the checkout process, the consumer reacts to that that friction, we’re not going to be satisfied with that friction. This is an early program for us and its making Selecta part of that conversion optimization efforts. We’re not going to just let - sit back and be satisfied with some conversion friction there. Over the next couple of quarters, a big part of our testing will be refining that checkout pipeline to make it as smooth and seamless for consumers as possible and hopefully we can mitigate some of that conversion headwind that makes the compounding effective of the membership fees even more powerful as we go forward. So we have real work to do there over the next few quarters and we have a team whose sole focus is really pushing on those elements.

Okay. And if I can just ask one follow-up. How does it work on the merchant side, do you need to go and renegotiate and get the member - merchant enrolled into the program or is that something that's purely under your discretion?

It’s a great question for one, thanks for that Deepak. It’s purely in our discretion at this point for the base of the program but one of the things you are seeing is exclusive, so we are actually approaching merchants for exclusive experiences for Select members, because we want a Select customers to have an incredible experience in the best possible experience at Groupon, which includes as a merchant. So increasingly we’re having those conversations with merchants but there really about driving incremental value for both the merchant and the customer but not to participate in the program overall, if that make sense.

[Operator Instructions] Our next question comes from the line of Thomas Forte from D.A. Davidson. Your line is open.

So Rich you did a really good job, so pardon me - you’re doing really good job running the business to generate free cash flow and the market clearly not giving your stock credit for it. I wanted to ask how investors should think about two possibilities one an accelerated repurchase effort given the free cash generation, and then two potentially growing private again given the cash flow generation? Thanks.

The big thing for us as I have said before is to your point if we’re going to do a great job running the company generating free cash flow, we need to stay focused on the running the company and - building a great business, and I think in this space in general it’s nice of you to say we’re doing a good job here but we’re not satisfied with where we are and we seen opportunities to not just run a solid business that generates good adjusted EBITDA and free cash flow. We see the potential to create a much, much bigger business that is the growth business that can be a part of consumers and merchants everyday life. So, we feel we have to be doing both which really plays into our capital allocation strategy and how we think about that. And I think as you know, we repurchased over $900 million of stock over the last four or five years. So we've done a lot there and to return value to shareholders. We’re always a balancing that whether that repurchases or other ways to return value to shareholders with investing in our organic efforts that are critical to transforming the business things like voucherless and select. Our efforts around booking and card-linked as well as with M&A which we've been very clear about it and very public about that we expect to be more aggressive going forward, because especially as we see ways to accelerate the strategy, as we see ways to generate more value. And so we’re constantly balancing those pieces, but ultimately that bakes into us focused first and foremost on building a great company and running a great business while we transform the core of how this product works for consumers. And that's about us being focused on the long-term sustainability of that free cash flow and adjusted EBITDA in the long-term growth potential in the total platform.

[Operator Instructions] And we have no further questions in queue. This will conclude today's conference call. You may now disconnect.