Good day, everyone, and welcome to Groupon's Second Quarter 2020 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. [Operator Instructions] Today's conference call is being recorded. For opening remarks, I would like to turn the call over to the Chief Communications Officer, Jennifer Beugelmans. Please go ahead.

Good morning, and welcome to Groupon's Second Quarter 2020 Financial Results Conference Call. On the call today are our interim CEO, Aaron Cooper; and CFO, Melissa Thomas. The following discussion and responses to your questions reflect management's views as of today, August 7, 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 for the year ended December 31, 2019, and subsequent quarterly reports earnings 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, and select press releases and social media posting. On the call today, we will also discuss the following non-GAAP financial measures, adjusted EBITDA, 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. 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. And with that, I'm happy to turn the call over to Aaron.

Thanks, Jennifer. And thanks to everyone for joining today. We are looking forward to giving you an update on our recent progress and further outlining our strategy and execution plan to win in local. When I was appointed the Interim CEO in March, I had two primary objectives. The first was to work with the team to stabilize the business. At that time, COVID-19 had already begun to wreak havoc on the economy. Our local business had fallen nearly 80% and the world was entering a global shutdown. We were in a cash burn position, and we needed to accelerate and expand our plan to rightsize our cost structure. I'm proud to say that over the past few months, we have stabilized the business and strengthen the balance sheet. Today, we have nearly $800 million of cash and we generated over $70 million of free cash flow in Q2. We have created a substantially reduced cost structure and are on our way to take $225 million of fixed cost out of the business. And we have put variable marketing spanned by over $50 million in Q2 alone. We are well-positioned for the future. On today's call, I'll spend much of my time talking about my second objective, our strategy to return the company to growth, and our execution plan. But first, I'd like to provide some context in the remarkable progress we have made as a team over the past few months. As I mentioned, we have lowered our costs meaningfully. In fact, based on the actions we are taking, our SG&A will be approximately 30% lower compared to 2019. Given this, we can be significantly more profitable on an adjusted EBITDA basis at lower levels of gross billings and gross profit. While Melissa will provide you with additional context…

Thanks, Aaron, and thanks again to everyone joining us this morning. I hope you are staying safe and successfully navigating the prolonged impact of COVID-19. I want to express my gratitude to our team here at Groupon. Your hard work and continued focus on helping us face this pandemic is really inspiring. Since we provided a preview of our second quarter performance with our first quarter results in mid-June, I won't spend too much time today going through them in great detail. Today, I'll use my time to discuss our balance sheet and liquidity, a few key insights on second quarter results, key data points on July trends, progress on executing our restructuring plan, and I'll end with how to think about our financial model over the longer term. As usual, you can find a full set of financial results in the press release and Form 10-Q that we filed yesterday. Starting with an update on our balance sheet and liquidity position. In the trough of late March, local units were declining nearly 80% and we were burning cash. Since late March, we pivoted quickly to stabilize the company and strengthen the balance sheet. We designed and implemented a multiphase restructuring plan to create a path forward to reduce our fixed cost base by $225 million on a run rate basis. And we cut our variable marketing spend by over $50 million year-over-year in Q2 alone by significantly shortening payback thresholds, foregoing brand investments, and aligning spend levels for consumer demand. We also implemented a number of other incremental in-year cost savings and liquidity preservation measures, including furloughs, to position the company for the near and long-term. In total, we furloughed or initiated exits of approximately 2,700 employees within our base of nearly 6,300 employees as of March 31st, 2020.…

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

Thanks so much and I hope all as well with everyone on the team there at Groupon. Two, if I can. On the merchant side, I want to know a little bit more detail on what you think you're trying to unlock on the merchant side? Is it going deeper with existing merchants? Is it reengaging with merchants that maybe tried the platform in a prior era, and you just feel like you need to reengage with them, or is it bringing new merchants that maybe had not transacted or listed supply with Groupon in the past? And what you see as some of the keys to unlocking that on the supply side? Second quarter on the demand side. It sounds like, obviously, getting velocity of shopping among your power users, your current base is pretty important for the success over the medium to long-term. Do you think that is a supply issue, or do you think that's a UI issue or a remarketing issue? So, again, the second question will be also like maybe a little bit more granularity on what you think the unlock is from a shopping velocity standpoint? Thanks so much.

Hey Eric, thank you very much for the question. You're getting right at the heart of the strategy, which the team has just worked so hard on. And I know when we talked last, we said we're excited and sharing it with you today. So, I appreciate you coming right after it. Let me take a step back and just share a little bit of the broader context. And then I'll fit your questions about which merchants and how we're going to go deeper and how that will impact merchants as well as what we see is like what's blocking customers from buying more. I'll fit those right in. In the broader context, Groupon is a large inspiration marketplace. And this is what we've done for years. When Groupon suggests something to customers, the customers react. This is something that's very special to us. And for selling Groupons, which are deals in the way -- those are deals, we sold billions of dollars in sales, and both customers and merchants love our deals offering. What we're doing now is we're adding offers to complement deals. What offers do is it paves the way for us to expand to the larger destination marketplace TAM, that's the $1 trillion TAM that we've been talking about, with a proven marketplace growth approach. So what offers are going to do is they'll service higher intent customers, which are people that are looking for services that they want, so the customers always have something to buy. Let me map that directly. And that's just -- that's the large thing where how offer complements deals. And so the way that that's going to show up with merchants is that merchants now, they can add more. And so I talk to merchants all the time. And so…

Yeah. And the one point I would add, Eric, as well, is just, as a reminder, the unlock that we see to our model is really driving purchase frequency. And when we look at just getting one additional purchase from just our North America customers alone that opportunity is greater than $750 million of bookings annually, so large opportunity to drive that financial model there.

Great. Thanks so much.

Our next question comes from the line of Ygal Arounian with Wedbush Securities. Your line is now open.

Hey good morning, guys. Thanks for all the details. It’s really helpful to hear the strategy laid out. I guess, I want to ask on getting through in the current environment, where there's still a lot of local businesses that are closed, maybe a little skittish to offer discounts or things like that. How are you -- how deep are you in rolling out the strategy for offers and building out the inventory density? Have you started, have you seen any resistance from the merchant side, maybe saying, let's wait until open up a little bit more? Just how that progress has been going? And then a follow-up on the marketing question. Is there a shift in marketing strategy that comes with this to, kind of, highlight to consumers as well, that there's deep discounts, and then 15% off and things that are full price that could drive people into the platform more frequently from the top of the funnel? Thanks.

Thanks for the question on the strategy. Let me tell you where we are and how we're running the test that we talked about in the prepared remarks. So the test design is to find signal quickly. We have four test markets and we have control markets. The teams are aligned to get the right inventory on the platform quickly. And if it works, which we're planning it will and believe it will, we'll see billings lift within about six months. So these markets will be improving versus our control. That's what we're looking for and that's what we expect to see. The test is going to inform the right level of inventory density. This gets after your question as to how merchants are responding. And it will help us understand the optimized mix of deals offers and market rate, which applies to the example of the manicure-pedicure merchant that I talked about earlier, manicure-pedicure facial merchant I talked about earlier. And so what the teams are doing is they're adapting daily to the test and insights to make sure that we deliver on our plan to get signals there in six months. As for marketing, yes, marketing is involved here as well. So what we've done is, we've segmented all the customers and all the merchants and have marketing communication plans to bring the customers along to make them aware of this expanded inventory offering. So an example, tying back to the example I gave to the merchant, would be, if you were a customer that went into that merchant and you bought the manicure. For years, we haven't allowed you to buy the manicure again. And we haven't allowed you to buy the facial, because the merchant couldn't put the facial on. So this is a straightforward marketing opportunity that are marketing team can't way to get after. Melissa, anything to add?

Thanks.

Sorry. Go ahead.

Well, I was just going to ask a follow-up question as – a follow-up on a separate thing, if that's okay.

Absolutely.

And talking a lot about local, which makes a lot of sense. But goods also outperformed and drove a big part of the beat in the quarter. And, obviously, in the current environment, e-commerce is kind of taking on a new life. And you guys made the decision to move to 3P and not exit goods completely. Just wondering, if you have any updated thoughts on the Goods business and expectations for going forward? Does it make sense to kind of step into it a little bit more than maybe you were thinking a few months ago? Just thoughts around Goods a little bit more. Thanks.

Yes. Thanks for asking. I'll take this opportunity to congratulate the Goods team, because you called them out. They've done a great job since the pandemic onset at the end of March. This team has really rallied along with our marketing team in shifting and taking advantage of our full assortment. So team, thank you very much. As for Goods, let us be clear, we've leveraged the Goods category, and now we think we can leverage it at substantially lower cost base. We're moving to a third-party, where we sell deals and we let other people handle delivery. And I want to be clear, within that, local is still our top focus. So even though we've used Goods, and it's worked extraordinarily well, and our customers like it, we see winning on the other side of growing in local. And we expect with our strategy outside growth in local going forward. So local is the strategy. Goods is a tool in the arsenal. Melissa, anything to add?

Yeah. The one point that I would add there is, as you saw in Q2, the durability of our model and our ability to shift quickly into goods in a period where local demand dried up. As we continue to see volatility within -- due to COVID and as we see local slowdown in certain markets or pickup, we'll continue to toggle between our diverse asset base. But yes, over the long-term, we'd expect goods to become a smaller portion of our mix again.

Okay, very helpful. Thanks so much guys.

Thank you.

Our next question comes from the line of Thomas Forte with D.A. Davidson. Your line is now open.

Great. So, Aaron, Melissa, Jennifer, hope you're doing well and congrats on your efforts to navigate the challenges from COVID-19. So, I just had one question. You've done an excellent job articulating your plan. The question I had is what are the metrics by which management is going to be measured from a compensation standpoint? Is it going to be revenue growth, billings growth, EBITDA margin? Can you give some thoughts on that? Thank you.

Sure. Let me tell you about our strategy and the way that we're thinking about it and I want to back up to the broader thesis here as it relates to the way that we're thinking about the business. And then I'll ask Melissa to fill in, and we'll get after your question. So, one, thanks for calling out the quarter and the work that the team has done. Across the team, it's been really good work and I'm actually been incredibly impressed with the team's resilience and their ability to just absolutely do a job under tricky circumstances working virtually. So, with the business itself, things were not -- weren’t certain at the beginning of March -- at the end of March, beginning of April. And what I was impressed to see was the durability of the business overall. Even in those darkest times, we're doing over $5 million in gross sales a day. What the management team has shown and what I'm particularly impressed with is this team was able to flex down our cost structure within niche and adapt to support our customers and merchants, utilizing the full breadth of our assortments, while focusing on this new growth. So, looking forward, and what we're most focused on now and what's most important is that we have two major horizons of value. First is getting to up to -- getting 90% to our historic size, we'll produce record gross profit, as Melissa mentioned, and execution of this strategy. This is an enormous focus of ours. And as Melissa mentioned as well, one additional purchase would be about $750 million in billings and help us show up and taking share of that $1 trillion TAM we've been talking about. So, our focus, we think the local recovery case is clear, and management believes we have an absolute ton of upside. Melissa, anything to add?

Yes. So Tom, as you think about how the management team is being evaluated, more broadly, I would call out two key areas first, right, in the midst of COVID, making sure that we can stabilize the business and put the company in a position to pursue its growth strategy. And then number two, executing on that strategy. So, the KPIs that we have outlined are certainly going to be ones that are going to be of focus and ones that management is going to be measured on. But really, what we're trying to do here is return Groupon to long-term sustainable topline growth as well as delivering strong EBITDA levels. So, that's ultimately what we as a management team are going to be judged on from a success perspective.

Thank you for taking my questions.

Thanks Tom.

Thanks Tom.

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

Great. Hey guys, thanks for taking the question. Two questions from us. First, Aaron, the new initiatives you listed sounds really good. How should we think about where your economic take rates, either on revenue or gross profit basis, land over the long-term compared to current levels? And then the second question was, Melissa, can you provide some color on monthly cadence in various categories or verticals, and perhaps maybe how some of those are trending in those are trending in July? Thank you.

Sure. Thanks, Deepak. Why don't I start on the economics and I'll ask for Melissa's thoughts as well. So the entire approach that we're looking at is the way that other proven marketplaces have been built. And what I love about this strategy is it just names so clearly that we're an under-optimized business and that we're now going to apply proven practices that we've seen other places at scale in many other marketplaces and advertising platforms. So offers, which we will start at a lower margin, we will get the flywheel moving, because I already know that the customers are interested and we believe the demand is there and will be strong. With that, we aim to get to our tipping point, which really represents a new tier of strength in the marketplace. As we get there, and this is important to the economics point, is what the -- what marketplaces do is they allow the sellers, in our case, the merchants, to compete on an opt-in basis using tools like sponsored listings or promoted results, and there's many other tools as well, which allows us to capture later margin there as well beyond just unit transaction margin. Melissa, maybe to add?

Sure. There's two things that I'll call it. First, I'll just point out that, Deepak, one of the things I mentioned in my prepared remarks that's really important is really, given the cost reductions that we've taken, even just sustaining those cost reductions, we -- and GP returning to only 80% of pre-COVID levels, we believe we can be in a position to deliver $250 million. So definitely highlighting the power of our financial model given the rightsizing we've done at the cost structure. Then when you talk about the strategy, and that's really further unlocked to that model. As Aaron mentioned, I think, he did a pretty good job there of articulating what the P&L will look like. But I think the call out that I would make on offers, in particular, is that we do expect that to create some pressure on GP margin over time. But it's important to remember that we do believe that offers will be largely incremental to the business. So that is something to keep in mind there. And then we bring that margin up over time once we introduce merchant monetization tactics.

Got it. And then the second question, on monthly cadence, anything you can add there?

Sure. In terms of monthly cadence, there's a few things that I would call out. So in June, mid-June, we released our results. We did -- following that, we did see continued acceleration in local recovery throughout the month, as you can see from our Q2 beat. But as we headed into July, as we mentioned, we did see some volatility, particularly on the North America side of the business. So when you think states within North America, so Texas, Florida, California, the places that led the recovery for us in Q2, we did see a slight pullback there. But states that were slower to reopen, so think northeastern states, as well as Illinois, those had served as an offset, because we have seen sequential improvements there in July. When you think about international, there, we did see acceleration through the month of July. And the key – as compared to June. And I think the key context I provide there is just from a geographic standpoint, one thing to remember is, U.K. is our largest market historically in international, and that was a country that was much slower to reopen. It didn't reopen really until early July and have taken a very measured approach to that reopening. But that has served as a tailwind. And then when you think about the category side, HBW has certainly led the recovery for us on the local side, our beauty and wellness business, that has led the recovery for us on the local side. And then as you would expect, as local recovers and we're getting more velocity there, our Goods business would be kind of falling to the background there. But we are taking a market-by-market approach here. So as I mentioned earlier, we'll be toggling between the different categories and making sure we're servicing up relevant supply to our customers on the site. So we believe we demonstrated the durability of our model in Q2 and we plan to continue to leverage that as we proceed through the balance of the year, because we do expect there will be some volatility over the next six to 12 months.

Got it. Okay. Thank you very much.

And our last question comes from the line of Michael Ng with Goldman Sachs. Your line is now open.

Hey, good morning. Thanks for that question. It was helpful to hear about the new inventory initiatives. And maybe to ask the margin question about offers in a different way, I think during your prepared remarks, you said that some of the traditional deals would result in merchants funding about 75% of the costs. Can you talk about what it looks like from the merchant side for some of your new inventory products, like offers or market rate relative to that 75%? Thanks.

Absolutely. And then, Melissa, please add. So the way that we're explaining this to merchants – and again, right now, our test will inform exactly the margin structure we go with, which is why we've constructed it in the way that we have. The key with the suite of inventory products is the deals continue to drive the inspiration at a discount. Deals are for new customer acquisition, to introduce a new service and to get that volume that Groupon is known for and has just perfected in our inspiration model for years. What offers do, is offers fill out the marketplace. That's the same as every other marketplace-oriented business and advertising platform out there. So the economics will be in line with other marketplaces and other advertising platforms. That allows offers to compete as an always-on option to complement our deals inventory. Melissa, anything to add?

So, I think, the key point here is that offers really provides a lower cost option to get some of that full catalog inventory on the site and fill out the marketplace and drives further velocity on the platform.

Great. Thank you both.

This concludes Groupon's second quarter 2020 financial results conference call. Thank you for your participation. You may now disconnect.