Good day, everyone, and welcome to Groupon's Fourth 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, Jennifer Beugelmans. Please go ahead.

Good morning, and welcome to Groupon's Fourth Quarter 2019 Financial Results Conference Call. On the call today are our CEO, Rich Williams; and CFO, Melissa Thomas. The following discussion and responses to your questions reflect management's views as of today, February 19, 2020, 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 earnings press release and in our filings with the SEC, including our annual report on Form 10-K. 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, adjusted EBITDA margin, free cash flow 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 reconciliations 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. Our gross profit comparisons are FX neutral, including gross profit per customer. And with that, I'm happy to turn the call over to Rich.

Thanks, Jennifer, and thanks to all of you for taking the time to join us today. In addition to this call, we've also issued our fourth quarter release and quarterly letter to stockholders. I hope you'll take the time to read them both and review our slide deck as they all go into significant detail about our results and strategy for 2020 and beyond. Our fourth quarter performance was disappointing by nearly every measure, and failure to meet the financial expectations we set will understandably frustrate our shareholders, as it has us. This performance shortfall, coupled with the significant headwinds we faced, call for profound change, and we're taking immediate and decisive action to return the company to growth. We worked with our board and external advisers to develop a strategy and execution plan to unlock the potential in the platform and assets we've built over the last 10 years. We believe that our plan can return Groupon to high single-digits billing growth by 2022 while expanding adjusted EBITDA margins. Our strategy is simple: turn Groupon into the local experiences marketplace. This means planning a quick exit from the Goods category, dedicating resources to expand our local experiences marketplace and executing a new course of action focused on 4 core priorities: first, building high-quality inventory density in core cities and bringing on merchants' full catalogs; modernizing the mobile experience for customers and providing new tools to help merchants grow their businesses; relaunching the Groupon brand and marketing strategy to move from deal-centric to a local experiences marketplace; and reducing our costs and rightsizing our spend to support our go-forward business. We will be laser-focused on the biggest opportunity for Groupon and where our true strength lies: local experiences. It's a $1 trillion opportunity. We had $3.4 billion in billings related…

Thanks, Rich. And thanks again to everyone joining us this morning. As you've heard, we know we must move quickly to return Groupon to a growth trajectory on both the top and bottom line. We have a great opportunity to build a more valuable business by solely focusing our efforts on the $1 trillion plus local experiences market. At the same time, any company facing transition must appropriately size up and plan for challenges that are inherent to change, and Groupon is no different. Today, I'll use my time to walk you through the drivers behind our Q4 performance, including insights on units and traffic trends, and talk through our operating goal for 2020 as well as our financial outlook for 2022. After that, we'll open the call for questions. In the fourth quarter, gross profit was $310 million and adjusted EBITDA was $84 million. Our fourth quarter and full year performance fell far short of our expectations, and we did not deliver on our goal of $270 million of adjusted EBITDA for 2019. We are incredibly disappointed with these results. As we entered the fourth quarter, we expected to face ongoing traffic headwinds, customer losses in North America and challenging macroeconomic conditions in Europe. We also expected continued momentum in North America Local, positive contribution from conversion initiatives, including our recent Guest Checkout and Universal Cart product launches, net neutral gross profit impact from Select and higher marketing leverage compared with Q3. The fourth quarter was much more challenging than we predicted. Traffic headwinds, particularly from organic channels such as e-mail, became significantly worse than recent trends. Competition in Goods rose to levels that left us unable to compete effectively. And our conversion initiative, including Universal Cart, did not deliver the benefits we had expected. To give you insight…

[Operator Instructions]. Your first question comes from the line of Eric Sheridan with UBS.

Maybe two, if I can. On Slide 8, you talk about the factors you can control in the transition the business is going to go through. Is there a way to frame what investments, whether it be in dollars or in terms of time and effort, has to be put behind those factors you can control? And how we should be thinking about those factors evolving, not only through 2020, but against the medium-term goals of 2022? And then secondly, when we think about capital and deploying capital, not against the business, but also against shareholder returns, any update on how you're thinking about shareholder returns against what your balance sheet looks like and the free cash flow conversion of the company, again, not just in 2020, but maybe across the medium-term goals for the company?

Thanks for that, Eric. I'll start and then Melissa could jump in on, especially as we get into the capital allocation. As you look at Slide 8 and that column around the from and the to, I think just to try to frame that a little bit, and we've laid this out as you think about our milestones over the course of the year, but they're going to be frankly, all consuming. And every piece in here is a critical piece as we think about moving forward. It's highlighting -- the first one on that slide being that the Goods exit itself, and that's going to be a significant undertaking for us. As we mentioned in prepared remarks also, we brought in some additional execution capacity and strategic capacity on that side to help us navigate that. So we're doing the right things by all of our core stakeholders there and moving through. So that's going to be a pretty significant undertaking. Obviously, less about significant incremental investment outside of bringing in some help from our execution assistance on that side. When we really move into the other pieces of traffic and inventory, U.S. experience, et cetera, those are the crux of our strategy. And so much about that. It's less about incremental investment overall and more about reallocation and focus of the investment that we already make as a company. So putting our resources on these biggest opportunity areas as 100% of their time and energy. So while there will be some areas where we had the up, I would particularly expect us to put some additional capacity on the sales function as we start to scale up and roll out to additional cities. I would also expect that to be really buffered or addressed and self-funded, frankly, by moving resources from other parts of the company to enable us to do that. So I think a lot of this is really geared around reallocation and focus of our energy, given the total capacity of the company, and less so about incremental investment on a unit level. On capital?

Yes. So just to reiterate what Rich said, it's essentially, really this is allocating our capital and our resources kind of differently within the organization across supply marketing and product. When you think about ultimately kind of how we're thinking about capital allocation over the next few years, we are going to be focusing more of our capital allocation, really, to support our strategic goals that we've outlined and that Rich outlined in detail. When you think about kind of over the longer term though and free cash flow generation of the company, we have, in our slides outlined, are what we believe as our target financial model. Essentially, what that calls for is a free cash flow conversion rate of 65-plus-percent once we're operating at scale here. So what I would look at, think about 2020 and 2021 as the building years, and that's where capital allocation will be more focused on really capturing that $1 trillion-plus local marketplace opportunity.

Your next question comes from the line of Deepak Mathivanan with Barclays.

A couple of questions. So first, what happened specifically in November that led to the sharp decline in traffic? Was it all related to Goods? Or is there any external changes that kind of accelerated the impact? And then subsequently, you noted the rebound in January. What was driving that? That's the first question. The second question. I understand the challenges in the Goods business. How confident are you on the opportunities to kind of unlock the growth in Local? So can you provide some color on kind of what categories maybe you're planning to improve density in? Are these challenges, in your view, sort of largely related to selection and conversion? Or is it broadly also due to sort of the top of the funnel consumer demand for the platform?

Thanks for that, Deepak. Great questions. So specifically, yes, I think, in fact, as I look at November, it's hard to separate, I think impossible to separate the external factors and just broadly in the market from what we saw. I think we saw an extremely frothy, competitive environment, but we're a large scale, e-commerce players. We're playing in some of our historic strongholds, particularly on the paid marketing side. So all of those were contributing factors. But I think at the end of the day, it boils down to the value proposition that you're putting in front of a customer. And I think the what we've seen, in particular, over the course of the last year in the Goods landscape specifically, it's just -- it's a different world out there, and it's accelerated really quickly. Customer expectations of shipping expediences, you have fundamentally changed, and the requirements of comprehensive inventory, et cetera, and/or specific orientation around experience-based retail. Those have been very, very fast. And I think within that, we had a spot where consumers just weren't engaging with our product in the way that they have in the past. And I think a lot of factors contributed to that. So we saw that occur in November. So I think our -- as we mentioned, our primary challenges were around Goods in that period. And that, however, has a cascading impact on traffic overall, and as a result, all of our categories. But Goods was really the crux of that And that's the time when we're also -- where the entire merchandising strategy of the company is generally pushed around Goods. So we had to get in there and start to make some changes on that front. And given the late timing of the holiday peak this year really…

Your next question comes from the line of Thomas Forte with D.A. Davidson.

Great. I wanted to know, as of today, how many International markets you operated in and the number of those markets that are cash flow positive?

Tom, thanks for that. So we operate in roughly 15 markets today or in 15 markets, if that's what you mean on the country level. We operate in hundreds of cities. Melissa, you want to add?

Yes. I mean we haven't provided cash flow details on our specific business, Tom. So beyond that, really you can kind of look at our disclosures on what we think the business is generating from a P&L perspective. So you can certainly kind of look at that as a guide. For 2019, International has been particularly challenged, and Q4 essentially was no different. U.K., given the macroeconomic conditions that we've seen there, certainly faced kind of the similar dynamic to what we saw in Q3, but we did also see kind of broadly across Europe macro challenges impact us there. We still believe in the International opportunity, and we still believe we're underpenetrated there and have a lot of room to run, but certainly still seeing macro and Goods with a global issue, not just a North America issue in the fourth quarter.

Your next question comes from the line of Ygal Arounian with Wedbush Securities.

I have a few. So first, just want to address maybe the balance of the traffic between Goods and Local. Local declining 11% in the U.S. and then rebounding in January. So Goods has historically, and I know this is deteriorating, but Goods has historically driven some traffic to Local. So we're going to be pulling that out. We are reallocating impressions to Local so that should offset. And I know we had a rebound in January. So just how to think about the -- maybe the degree of growth in January, how sustainable that is? Are there going to be puts and takes? Or is this really all a positive by taking out Goods and reallocating the impressions? Second, on customers. You noted the headwinds increasing in 4Q. I think, maybe you could just refresh my memory, but I think you were expecting the customer headwinds to flatten out in 2020. So is that something that's going to continue pressuring? And how does that lead to unit growth, to headwinds or otherwise in 2020? And lastly, a modeling question. I just want to make sure I understood you. You're going to be reporting Goods as discontinued operations beginning in 1Q. So we should be thinking about pulling that out of our kind of revenue and EBITDA numbers immediately?

Thanks, Ygal. I'll start on the traffic side. And just -- and how to think about, overall, the exit path and impression reallocation and just how balance of traffic plays into that. So yes, Goods has been a significant part of our traffic. It's highly seasonal. In particular, just we didn't obviously see the kind of seasonality we expected in Q4, but it has been historically a significant driver of traffic, particularly that time of the year. I think the key piece, however, to think about it is how we manage our impression pool. And as I mentioned, historically, it's been around 40% of traffic going to Goods. And at certain times of the year, in Q4, that could be as much as 60% or 70% during peak periods. But what we've really seen change there over time, it's not just the volume of traffic or mix. It's just the overall utility or productivity of the impressions that we've been allocating to Goods has been declining. As a part of that, we've also just seen more division and more clear division in the customer base. And as you point out, historically, it has been more of a driver of Local activation. And at times, we -- I think in the past, we've shared, as one of our largest channels of Local activation, that's just no longer the case. And we've seen that the customer base is becoming more specific in what their shopping behavior really drives. And so those things combined where you have a lack of utility of the impressions and a lack of cross-shopping behavior and more division or more calcification in the customer base, it makes it a lot easier to make these kinds of decisions. Still very hard call to make given the overall size of…

Yes. On the January side, I think the one item that I would mention there as well, and you can see in the goals that we've outlined in the press release and mentioned on the call, that one of the target points we had was in 2H. We expected North America units to return to growth. Ultimately, we are seeing the benefit in January of monetizing the impressions we get more effectively by shifting from Goods to Local. But the way that I would think about it is that's kind of step 1 of the process. Really 2H is when we start to see some of our strategy take hold as you think of the different investments we're making around our inventory, our product through modernization as well as ultimately the brand relaunch. And what we've tried to outline for you in the investor deck is essentially kind of a time line of when you should expect those key milestones to start to hit so that you can measure that progress there. So that's on January. On the headwind side for customers. So you had mentioned or asked a question on what we're seeing there, what we're expecting. So the headwinds did increase in Q4 on the customer side, and that was largely driven by Goods' lack of engagement on the platform. So we did see customer losses come in at a more accelerated pace than we expected, than what we had seen in the prior quarter. As you look forward to 2020 and 2021, we have not provided ultimately customer numbers there. The way that I would think about it though is we mentioned that we have 8 million Goods-only customers and we have 35 million, the 35 million remaining customers are engaging with Local and Travel and cross-shopping across our platform today. Where we're going to really be focused is on retaining those cross-shoppers who historically have purchased across the platform. So I would kind of focus on that 35 million customer base that we've referenced in our remarks. And ultimately, what we'll be driving towards is retaining the cross-shoppers and then engaging ultimately that customer base across the platform.

Yes. And the only other thing that I'll add there is when we talked about the moderation of our customer losses in 2020, we hadn't contemplated an exit of Goods in there. So as we do -- as I mentioned, we do have more of a calcified customer base there, that's just been more focused and specific to Goods only. As we start peeling back in Goods and moving more to Local, you should expect that to -- some of those customers, we're going to work hard to get them into Local, but we should also expect that some of them that are Goods-only shoppers, that think about us only as a Goods brand, as they start seeing less and less Goods, we should expect them to increase their attrition rates. I mean I think it's just reasonable to expect that, and I wouldn't want you to think anything else.

Yes. And then the last point on timing of discontinued operations. So the way that you should think about that is, ultimately, we will -- we expect to trigger discontinued operations when we exit the operations of those businesses. So the time line that we've given there as we would expect that by end of the third quarter, we would be exiting the North America business. And for International, that timing will likely be by end of year. As we said in our prepared remarks, our works council dynamics that we need to work through there such that, that could impact the timing. But that's really how you should think about when we would get discontinued operations treatment. It's going to be later. Later in the year when we ultimately exit.

Your next question comes from the line of Brian Nowak with Morgan Stanley.

Just wanted to touch on the local experiences strategy a bit. Maybe talk to us about sort of the strategy to have density -- sufficient density intensities by the end of the year. How many cities do you have sort of that density that you're looking for in right now? And what are some examples that we could sort of look at just to sort of understand where you're headed with this? And then from an execution perspective, talk to us about what changes you have to make to the sales force. Or how do you think about sort of timing of reallocating and retraining the sales force to really focus a lot more on these local experiences within the 10 cities?

Okay. Thanks for that, Brian. So I'll start. I think, one, it's a very competitive space. So one thing we're not going to do is lay out our road map for our city focus on that side. But as I mentioned just in one of my comments just a little bit ago is that as we've been building breadth of catalog, especially as we brought on more and more third-party partnerships and that's just build broader coverage for Groupon, we've seen some natural density case studies developing in the business. We've also been focused as a company on building upon those in more targeted areas. So as much as we talk about cities, I guess the point of that is it's really a neighborhood challenge. This is really about getting much more into the sub zip code level and making sure not just at that sub zip code, but for a broader market, you have the supply that matches the intent and consumer demand that exists there. So just a much, much more targeted strategy. That's also more strategic in how it's constructed. So -- and I'll talk about the sales changes there in general. But it is that as we've seen it, it's that combination of having the expected and trusted brands in a given market at a broad level and then with the really specific neighborhood level density in core categories that fit that market. So it's just a much more targeted and much more granular approach. On that front, when you think about sales force and how we have -- and the change in the go-to-market strategy, as we mentioned in -- you can see it in our investor presentation, we're -- this is something we're moving on right now. So we're already rolling our training. We're…

Our final question comes from the line of Michael Ng with Goldman Sachs.

I just have a few on the EBITDA path and on modeling. First, on 2020. You mentioned we should see an $80 million EBITDA impact from the Goods exit. So would it be as simple as taking your prior guidance of $300 million and subtracting $80 million? Why or why not? And then second, it seems like there are a few moving parts for 2020 and beyond. I think you guys mentioned an additional $75 million of SG&A related to Goods and an additional $50 million of cost savings opportunities partly offset by the $40 million to $50 million of cloud expenses. How should we assume these cost savings and cloud expenses flowing over time? Is it more front weighted?

Yes. Okay. So I can take those. So first, your question on 2020. So just one clarification point there. On the $80 million EBITDA impact that we've provided, about half of that is related to Goods exit and any related disruption that we're expecting there. The other half of that is related to essentially lapping lower bonus funding from 2019 just based on performance relative to targets there as well as the cloud computing migration. So that's just some clarification point on that. As you think about kind of the $300 million guide that we've given in the past, I think the one thing I would keep in mind is that was also predicated on us hitting our approximately $270 million guide. We've clearly seen deterioration in the business since that time that is effectively kind of reset that baseline there. So I wouldn't say that it's really the $80 million that I called out in my prepared remarks. As you think about kind of SG&A more broadly, so there's a few things there that I would mention. So as I said in my prepared remarks, we do estimate we've got about $75 million of direct costs associated with the Goods business. We do expect that we will be able to take those $75 million of costs and realize those savings over time, but that time frame, just given an end of Q3 exit in North America as well as end of year expectations for International, as you can imagine, the timing of realization of those cost benefits will not fully be there until 2021. And what we also are essentially going after is another $50 million on the indirect cost side. And the way to think about this is, ultimately, we are able in a kind of local experiences-only world to reset our cost structure. And the way I would think about that is really kind of a onetime reset of our cost base that we will be looking to do. The exit of Goods certainly does unlock the ability for us to do that. So again, you'll start to see those costs over the next, call it, 12 to 18 months is what we've said there in terms of time line. As you think about cloud, that $40 million to $50 million that we highlighted there, that's really over the next 3- to 4-year period is when you'll see those expenses play out. So that's how I'd start to think about that kind of cost timing.

This concludes our question-and-answer session. I will now turn the call back over to Rich Williams for closing remarks.

Thank you. And thanks again, everyone, for joining today. We understand that our investors are frustrated. We are as well. But we also hope that you believe that this strategy is the best path forward for Groupon. We also hope that we've effectively outlined our strategy and our plan and resources to execute. We appreciate your support and welcome your feedback. Thanks again.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.