Good day, everyone, and welcome to Groupon's Third 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 Third Quarter 2020 Financial Results Conference Call. With me 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, November 06, 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 in Form 10-Q. We encourage investors to use our Investor Relations Web site at investor.groupon.com as a way of easily finding information about the company. Groupon promptly makes available on this Web site 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 Web site, you will find additional disclosures regarding the non-GAAP measures, including reconciliations of these measures to the most comparable measures under US GAAP. And with that, I'm happy to turn the call over to Aaron.

Thanks, Jennifer, and Hello, everyone. We appreciate you joining us today and we hope everyone is staying safe and healthy. As the world continues to be impacted by the COVID-19 pandemic, I'm reminded everyday of the positive impact Groupon has on small businesses around the world. Groupon connects millions of customers and local merchants. And we believe that during this crisis, we have a big opportunity to help small businesses navigate through the pandemic and beyond. And this opportunity is large. We estimate our addressable market to be north of 1 trillion and we are already a market leader. In fact, just to give you a sense of our scale. In the third quarter alone, we sold over 12 million local units and our North American customers have spent nearly $20 million on massages, over $15 million on Botox services and tens of millions on leisure activities in their local neighborhood. Today, I'm excited to give you an update on how we're executing on our strategy to take share in the local market and return Groupon to growth. But first, I want to take a moment to highlight our third quarter results. On our second quarter call, we showed you proof points that demonstrated the durability of our model, even in the midst of COVID and we continued to build on this foundation in the third quarter. Looking at how far we've come since just the first quarter gives us confidence that we can continue to deliver the results we need to drive the business forward. To put this into perspective, we've gone from local units being down approximately 80% and an adjusted EBITDA loss of $22 million to local units recovering meaningfully, delivering $31 million of adjusted EBITDA in the third quarter and in our breakeven cash flow. We…

Thanks Aaron, and thanks to everyone for listening in today. As Aaron noted, we appreciate your time and I'm excited to provide you with a few updates on our financial and operating progress, including a review of our third quarter results, business drivers and current trends, the status of our restructuring plan and lastly, insights on our expectations for the fourth quarter. Starting with our third quarter results. As Aaron mentioned, we continue to demonstrate the durability of our business model and that we have the right foundation for growth. We delivered $597 million of gross billings, $304 million of revenue, $160 million of gross profit and $31 million of adjusted EBITDA. We were pleased with the strong sequential improvements we saw in local versus the second quarter, and the progress we made against our restructuring plan. At the same time, we posted nearly breakeven cash flow and exited the quarter with a solid balance sheet in approximately $780 million in cash, including $200 million of outstanding revolver borrowing. Our results came in above our expectations and we're very proud of our team's efforts. While there’s still a lot of work to be done and our local category only recovered to roughly 56% of pre-COVID gross profit levels in the quarter, we are making progress and believe we had the financial stability we need to execute on our growth strategy. Turning to a review of our core operating metrics. We ended the quarter with 34 million active customers. Since active customers is a trailing 12 months metric, similar to our commentary last quarter, we would expect this number to decline as it continues to reflect the impact of COVID-19. During the third quarter, we sold a total of 21 million units. Global local units were 12 million and included triple…

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

I hope everyone on the team is safe and well. Maybe sticking with the comments during your prepared remarks on the supply and the inventory side. Can you drill down a little bit and give us a sense of when you are doing what's within your control and sort of investing in supply and broadening out the supply in the marketplace? What we should think that might mean for either conversion of traffic or efficiency of marketing dollars, or return on customer spend when you think holistically about what the platform might evolve into over the next couple of years? Thanks so much.

Let me tell you a little bit about the inventory test and exactly how we see that flowing through. So as we discussed, we're seeing results in the scorecard we shared. And we know that winning for Groupon is in the other side of winning in local, which is this $1 trillion TAM that we've been talking about. And the winning in local requires building the inventory exactly as you mentioned. So that's why we're building a suite of inventory products that give merchants the flexibility to be able to put more on the platform, which is exactly what our customers want. And we're seeing the results in the merchant side with inventory growth being more than 50% in our test markets than in our control markets. Let me give you a couple of examples as to how the inventory is built, and I'll give you an example of a woman I talked to who manages a spa. So what she did is she had historically been running three deals with us, and she's a very good merchant on our platform. With the new offering, she went from three deals to 72 items. Now not every item is created equal but three deals to 72 items, fully unrestricted, that was our full catalog, fully unrestricted and added bookability, so the full trifecta of what we wanted to accomplish here. When I talk to her, which is a couple of weeks after she launched her new offering, we looked at the results and about a third of the transaction she was seeing was on inventory she never would have been able to add before, we changed the value proposition. So we look at what we're seeing on a merchant by merchant level. We look at the progress we've made on our scorecard. And we see just a ton of potential with the direction we're heading. I'll punctuate real quick just because we mentioned it before, but beauty and wellness alone, just one additional purchase from our HBW customers that we had in 2019 is already hundreds of millions in bookings.

And Eric, where I'd chime in there on your question is absolutely, we believe the strategy is key to ultimately unlocking purchase frequency, which will drive that marketplace flywheel. So as you think about over the long term, certainly would expect there to be efficiency marketing over time.

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

I wanted to ask about the goods business. It seems like the business model transition is tracking pretty well. But as you go into the holiday shopping period, how do you think about the selection and the inventory levels on the platform now? And what are you doing to kind of get it the right place for the next couple of months? And then related to that, is it fair to assume that during COVID times in markets where there is a bigger hit, like say, particularly in Europe, you have opportunities to merchandise goods better and achieve better conversion in some of the high converting areas on the website?

So anytime we talk about goods, I'm going to reiterate that winning for Groupon is on the other side of winning in local. That's the key. And the role goods plays as part of our ecosystem is similar to that of our broad, diverse supply base. The goal is to engage and support local buyers. So with goods in particular, a couple of things. As you noted, we're making good progress on our ability to simplify the business and run it in a lightweight way. So really good work by the team in order to get us here. As it relates to the way we think about goods in our overall assortment, here's just like some math that I think is helpful. With goods and with our assortment overall, we're not just targeting any customer. We're targeting local buyers who live near strong local supply, such that if we bring them in on a lower-margin item, say a good, we can capture the share of wallet on our differentiated local offering, which comes with significantly higher margins. So we expect this type of cross-category promotion to be something that we can more and more of, including in the holiday season. Now specifically to your point about Europe, to the extent that they're on more significant lockdowns. Yes, as demonstrated in Q2, we now have all of the experience we need that on a market-by-market, on vertical-by-vertical and even on a customer-by-customer basis, we can adjust our assortment. I'll drive home a point on that last one. Just because restrictions are at a certain level in different geographies, different individuals have different comfort levels in what they want to experience. And of course, they built with their behavior, we pick up on that behavior and we could market accordingly. So across the board, the marketing team is teed up to be able to support our merchants and also deliver for our customers over the holidays. Melissa, anything else to add?

No, I think that covers it.

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

So one of my questions is similar to something that's been asked but I wanted to ask a little differently. So to the extent that you had lockdowns in place in the US and Europe earlier this year, it seems like your strategy was to lean into goods, lean into delivery. So to what extent do you think you can apply that playbook if we go back into lockdown? And then I'll ask my second question after you answer that one.

We have the playbook and the playbook is ready to go, and the team is already beginning to execute on it across the markets in Europe. What I'll say, and I think it's an important detail, we learned a lot from Q2. No one would have necessarily expected the way that different local segments would have responded even in the darkest times. So for example, auto services, which is a big part of our local business. Auto services are something that people are more comfortable with. Specific health beauty wellness services are things that people continue to be comfortable with. And even in some of the more restricted US cities, they're continuing to be allowed at a reduced level, and people are comfortable with them as well. So you see that across the spectrum all the way down the spectrum to live events, where live events obviously across the world are doing far less business. So we've learned a lot from Q2. We have the ability to apply all of that insight and execution on muscle to what we ever comes with us going forward.

And as my second question, there's a concern across e-commerce in the fourth quarter about inventories and logistics. So what gives you confidence on your goods business that you'll have giftable products in inventory and then that the consumer will be able to get them in a timely manner from a logistics standpoint?

So we work with, in our new third-party model, we work with a main list of distributors that we have very good relationships. We know where they are. We know where their distribution centers are. We have the SKU level information and rather robust reporting. So if, for example, there was a problem with any one distributor, we can quickly switch to another or change product lines that we promote. One thing that's really special about Groupon as relates to both goods and local, and this applies to your other question as well, is we suggest to our customers what they should be interested in, whereas other marketplaces, be it goods or any other business, local or something else, they're reactive. We suggest is that power of inspiration allows us to suggest to customers different things they would be interested in. So if different lines of local were more restricted for a period of time, we could suggest something else and when that lines of local open up, we can suggest that in accordance with merchants' and customers' comfort levels. The same thing applies to individual goods items as well and on a distributor by distributor and SKU by SKU level, we have the ability to steer that demand.

Your next question comes from the line of Doug Anmuth from JPMorgan.

You talked about launching a marketing campaign in the test markets. So hoping you could just elaborate on the strategy and timing there, just given this kind of demand environment. And then also just curious, as you're going into the holidays here, how you anticipate kind of emphasizing local more relative to goods over these next couple of months. Thanks.

Again, this is where we're heads down focused. We have demonstrated the durability of this business from Q2 to Q3 and we've seen what that recovery looks like, so that just gives us so much more confidence in the model overall. And so we are focused on both. And so as we look at the success we've already built on the supply side, which is significant with the degree of inventory build, with the degree of unrestricted deals coming on and bookability as well, we can now start to say yes to customers more. So that is they want to buy something and we have the inventory and we're saying yes, whereas for years, we couldn't repeat it a restriction or we didn't have the inventory and we said no. So as we look at the customer side, this is where we just draw a lot of energy. What we're going to apply here is the same exact product discovery tactics that we took on the supply side. That's lean discovery. This is what's helping us test, iterate and change the throughput on our learnings to make sure that we achieve the milestones on our scorecard. So let me give you an example of just what we're seeing, and I'll talk a little bit more about what we're doing because it's early stages in what we're doing after we've now built the supply. The second half of this now six month period is to generate the demand and touched a lot of marketing campaigns. But the early adopter behavior is really encouraging. So one example, as we look at different customers and profile them, is a woman who bought a salt cave. And when I looked at her profile, she bought the salt cave in the middle of the summer. And right after the salt cave is added full catalog and unrestricted offering that was bookable, she went ahead and she returned for multiple other services in addition to another salt cave, something that we previously may have restricted before. So she added microdermabrasion, lymphatic facials, another type of facial. And so it's really taking advantage of our full catalog behavior. And so just by looking at customer behavior and early adoptions help influence our marketing campaigns, because our job is now to get greater share of wallet from our customers for our merchants. So we're testing campaigns that reposition Groupon as a marketplace for these individual customers and early adopters first and then for more people in these key cities, so that they can understand the full breadth of our offering, that they can -- more to buy and that they can buy and buy again. This manifests itself in unique customer journeys, incentives and promotions and we're really excited about it. Go ahead. You had a second question as well?

Just on local during the holidays, just how you plan on kind of shifting the focus.

So again within local, this is going to be a week by week. We have to watch things in week by week and we poke them also to do that. But specifically, again, we've seen certain local verticals continue to maintain, even within COVID, to different degrees. And so on a customer by customer, merchant by merchant level, we have the ability to flex our inventory. I can tell you that in a typical holiday season, local is something that is heavily gifted along with goods. And in particular, one of the categories that's the most gifted, it might not surprise you but is beauty and wellness. There's just some exciting things in there like massages that people like to give as gifts and are big purchases at that time of the year. So we have the ability to flex accordingly to customer comfort and level of restrictions and feel pretty confident in our approach.

Your next question comes from the line of Michael Ng from Goldman Sachs.

There are a lot of moving parts as we think about modeling the top line for the rest of the year. I was just wondering if you might be able to help a little bit in terms of translating the unit trends that we're seeing in October to date into what we should expect for bookings and revenue, appreciating that there's going to be some noise around the goods transition as well. Thanks.

In terms of what we're seeing and how we're thinking about the fourth quarter. So as I mentioned in my prepared remarks, North America local performance was stable in October. There’s a lot of macro noise right now, particularly with the US election this week, as well as rising COVID cases, so we're watching that very closely. On the international front, so there the dynamics are very fluid. We saw worsening trends in local throughout the month of October, so as governments implemented new COVID-related restrictions. And even as recently as this week, additional international countries, including the UK and Germany had restrictions go into effect. So the trends by market are what you would expect. So in the countries and cities with the largest lockdowns that's where we're seeing greater pullbacks in local performance. As Aaron mentioned earlier, we are going to be using our diverse set of supply and making sure that we're surfacing relevant offerings to customers.

And I guess as it relates to modeling bookings, should we assume that they're down in line with units or is there another…

Yes, that's a fair assumption.

[Operator Instructions] Your next question comes from the line of Ygal Arounian from Wedbush.

I want to dig in a little bit more into the test markets and the increased inventory and you gave kind of a one-off example. Are there -- and in addition to that, a lot of detail on the merchant side and what they're seeing. Is there more broad-based evidence, for example, that we're seeing frequency pick up in these test markets as we're starting to build this out? Is it easy to read through the COVID noise to get a good sense of what you're seeing early on while you're doing that?

And again, we are just starting the marketing now so the information I'm giving you from the early adopters is just that. With any new product launch, I think you're going to look at the early adopter behavior first and build your insights and marketing campaigns based on what you understand. And so yes, we have the early adopter information. We know that we've changed our value prop. We know that we can see behavior change. And so now the job is marketing. It's exactly what you said, it's to educate. We haven't launched the marketing campaign to any level of scale yet and so that's the work that needs to be done. I will say that even though COVID certainly made things harder, we have clear momentum on the merchant side. The merchants are engaged. They're saying, yes, to bringing the customers back and back repeatedly and that we know that more inventory is what our customers want, so that we know that we're on the critical path to growth. And additionally, as we are seeing new merchants come on at highly restricted rates, 90%, we will also believe that simultaneously, even within COVID, we can roll that out as well even beyond our test markets. So from insights that we can get from our customers, from launching the marketing campaigns, the insights we'll get from those and from being able to continue momentum on the supply side, including extending our learnings to value beyond the test markets, even within COVID, there's still a lot of energy that we have in driving this business forward, which of course, is built on the fact that we feel comfortable with the durability of our business as we've seen customers come back from Q2 to Q3. So we feel pretty good overall about both the test and the overall energy or what we're focused on.

And a follow-up I have kind of two part question on the merchant side. And so this full catalog concept is, I think, quite different than how Groupon has kind of operated before or been viewed by merchants. Can you talk about the initial reaction, the sell-through process? Is there any pushback from merchants and kind of feeling like maybe they're giving up too much ownership by putting everything on to Groupon? Or are they generally kind of excited about the opportunity to do that? And then it's early but maybe too early to get a good read, but anything positive you're seeing from sponsored listings and self serve in driving some of the merchant adoption?

I mean, what you're asking about like core elements of the value proposition, so this is exactly where we're focused. On the merchant side, we know merchants want more. And so your question is, is there any pushback from the merchants? The answer is that we have seen really surprising uptick. Now the uptick with our new merchants is extraordinarily high but even the uptick with our old merchants who then have to be trained on a new model and sometimes that's harder than introducing someone is significant. Let me give you a data point and this is a significant data point. Of the beauty and wellness merchants in these four markets, we look at the top merchants specifically. That's the 80-20, the merchants that make up 80-20 to sales. And very quickly, as we rolled out and perfected our sales pitch, over a quarter of them signed up not just for one of these things but the full trifecta, full catalog, unrestricted and bookable, and obviously, some of the ones outside that quarter signed up for more of these services, which is how we built the overall inventory growth and density. But you're not seeing an early product launch with like single-digit percentage uptick. You're seeing like our first go with this and putting this out there, you're seeing significant uptick among the merchants that make up the lion's share of our overall business, and that's on the full trifecta, let alone some merchants maybe not wanting to add booking but adding their full menu in an unrestricted way. So we're seeing really encouraging results on the supply side, and hopefully, that gives you a little bit more color as to how that is working. On the merchant experience elements, this is really important and we haven't talked a…

There are no further questions at this time. And with that, I would like to thank everyone today for joining the Groupon Incorporated Q3 2020 earnings conference call. You may now disconnect.