Good day, everyone, and welcome to Groupon's Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the Company's formal remarks. [Operator Instructions] And just a reminder, today's conference is being recorded. And now for opening remarks, I would like to turn the call over to the Chief Communications Officer, Jennifer Beugelmans. Jennifer, please go ahead.

Hello and welcome to Groupon's fourth quarter 2022 financial results conference call. On the call today are CEO Kedar Deshpande; and CFO Damien Schmitz. The following discussion and responses to your questions reflect management's views as of today, March 16, 2023 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 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, non-GAAP SG&A, 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. Unless otherwise noted, all comparisons to 2019 are provided on an FX mutual basis. And with that, I'm happy to turn the call over to Kedar.

Hello, and thanks for joining us for our fourth quarter 2022 earnings call. In the fourth quarter, we delivered local billings of $366 million, up 6% compared with the third quarter. While we drove a sequential improvement from the third to fourth quarter, there is no way to sugarcoat it. Our results for our local category were disappointed. Though, local billings performance was better in November, our business began experiencing significant headwinds in December, and as you will hear us discuss, these headwinds continued in early 2023. We are not living up to our full potential today, but we are taking steps to transform our business, improve profitability, and grow our marketplace. To drive our business forward, we are focused on three areas, improving the supply side of our marketplace to drive customer demand, leveraging and improve inventory base to make our marketing and promotional spin more efficient, and doing both of against a backdrop of a meaningfully streamlined cost structure and much better operational rigor. To begin, let's start with the cost structure. This is an area where we have already made notable progress. Last year, we launched a plan to reduce expenses and align our cost base with where the business is today. We have substantially achieved our Phase 1 goal to reduce our cost base by $150 million annually. Our Phase 1 actions were oriented towards sales, the completion of our migration to the cloud, and right sizing of our facilities footprint. When we announced Phase 1, we also committed to taking another $50 million of costs out by the end of 2023. Given our recent business performance, we have decided to accelerate and expand this Phase 2 of restructuring. Our plan is now to reduce our cost structure by an additional $100 million annually, which is…

Thanks, Kedar, and thank you as well to everyone who's joining us today. I'll use my time today to provide further insights into our fourth quarter operating financial results, factors to consider for the first quarter in full year 2023, and details on our Phase 2 cost savings actions. In addition to my prepared remarks, I encourage you to review our slides, press release, and 10-K, which contain more detail on our Q4 results. Taking a step back, before we go into our Q4 results, our performance this quarter was clearly disappointing and was not aligned with the potential of the Company. As Kedar discussed, we're taking steps to change this trajectory, so let's jump into our consolidated fourth quarter results. We delivered $468 million of gross billings, $148 million of revenue, $129 million of gross profit, and negative $5 million of adjusted EBITDA. We generated $10 million free cash flow in the fourth quarter and end the quarter with $281 million in cash, including $75 million drawn on the revolver, and we had nearly $19 million active customers worldwide. Turning to our local category, consolidated local billings were $366 million, down 17% on an FX neutral basis compared with a prior year, and 51% of 2019 levels. Looking to 2023, early results show local billings for January February are in line with the pullback we saw in December. Within our North America customer base, we had 9.2 million active local customers in the fourth quarter, down 7% quarter-over-quarter, and within our international markets, we had 5 million active local customers in the fourth quarter, down 1% compared with the prior quarter. Moving to our goods category in the fourth quarter billings were $70 million. Turning to operating expenses GAAP SG&A was $112 million for the fourth quarter, as we…

[Operator Instructions] We'll take our first question this afternoon from Eric Sheridan of Goldman Sachs.

Thanks so much for taking the questions. Maybe two, if I can. First on the new merchant acquisition strategy, can you help us better understand the two pieces of it the implementation of the strategy and hush, were you thinking about what investments need to be made to put the strategy in place going forward? And how should investors think about the second piece, which would be gaining scale on the supply side that would produce the revenue outcomes, the conversion outcomes, the yield outcomes that you're aiming for as an output of that strategy? That'd be number one. And number two. I just want to come back to the amendment to the credit agreement that was in the public domain in the last couple days. How should be thinking about some of the targets or elements of minimums of production, of EBITDA that are in the credit agreement and how that jives back to thinking about the transformation of the business over the next 12 to 24 months?

Thanks for the question. I would like to start by saying first thing is, we really appreciate everyone's flexibility with us moving the call and are happy that we were able to successfully complete the amendment to our credit agreement. So now going back to you answering your question, what I want to say is that, I will take the first on the merchant side and then Damien can take pride on the second one on the create agreement. The first one on the merchant side, if you look at it, we have two types of merchant. One is enterprise merchant. What there are big retailers, there are big chains, and then there is long tail of merchants, which are small merchants, which come on board platform either by themselves or using our sales force. Now, one of the things we are trying to do in this particular strategy is to make sure that we inherently understand what expectation merchant has. And so when we look at the scale of the large merchants, we are trying to make sure that we have a target list of merchants that we want to go after. And that there, there is an actual big price associated with this particular merchant. Not only we are trying to say, hey, this merchant is very powerful, we are saying this is the kind of deal structure we want because this is the kind of vertical and this is the kind of physical presence we require to go after these particular merchants. So sales force is very much focused with these particular precise targets, precise deal structures, that they're trying to go after, which will increase the effectiveness of our sales force, which I have mentioned before. And then for the long telecom merchant, we are making more and more strides on our self-service platform that when the merchant comes on -- they don't need to actually get in touch with a human. We can self-service them, and they can take on and off on the platform for scalability purposes. But I think the balance of this head versus tail was basically skewed for us, where we were trying to say, we are going to get more and more merchants on the platform in both using our sales force as well as self-service way. And that particular equation might have resulted into we're getting lots of merchant, but not enough quality that we wanted to bring on platforms. So being precise with our head and then being more self-service focused on our tail that gives us that kind of flexibility and scale to bring on more merchant and supply.

Sure. And then, Eric, for yourpart two of your question, with respect to the credit agreements and the adjusted EBITDA targets, and minimums, we really renegotiated our revolver to provide liquidity flexibility as we navigate a transformation in the various restructuring actions that we talked about today. And we're focused on improving or maintaining and improving our liquidity position. The amended agreement did give us add back credit for a number of the restructuring actions that we've taken. And these restructuring actions are part of that overall larger cost program to remove $250 million of costs from the business. So, we've taken significant costs out and you're going to see a meaningful improvement in our adjusted EBITDA profile going forward, starting in the second quarter, even at lower billings levels. So hope that answers your question.

Thank you. We go next now to Trevor Young of Barclays.

This is Alex Hughes on for Trevor. Thanks for the questions two, if I can. First question is on the cash flow commentary. Do you expect free cash flow to return positive in 2Q as you implement the Phase 2 cost savings, and while full year free cash flow be positive? Or was that one of the bigger drivers for withdrawing guidance? And then second, can you touched on it before, but can you kind of dig deeper into the trends you saw in January, February, and if you're seeing similar trends through March? Thanks.

Sure. This is Damian here. I'll take the first question on the cash flow generation going forward, and Kedar can take the question on business performance trends. So I think, you're getting the nail in the head right there upon completion of Phase 2 actions, what you heard today, the majority of them are going to be completed by the end of the second quarter. We're going to be generating cash flow and adjusted EBITDA a meaningfully way for the balance of the year. And so, while we we're going to see cash file flow in this first quarter, and that's part of a normal seasonal sequential pattern of this business as well as reflective of the business pullback. Cost actions that we're taking are going to improve and stabilize our financial profile, and our ability to generate cash flow on an organic basis going forward for the rest of the year, we're not really giving any guidance on cash flow position for the full year. And that's the way to think about our cash flow generation is, primarily our adjusted EBITDA profile to our CapEx, which we have also meaningfully lowered by taking much lower cost in our tech organization, and moving from our on-premise data centers to the cloud, and finally, our net working capital, which is going to be reflective of mostly of our local billings volumes. And Kedar for the business trends.

Yes, on the business trends, what we have seen in January and February is pullback, but at the core of it, it's a mix environment for us. So for example, there are some particular verticals, which are coming back at similar levels of last year, but at the same time, there are some verticals, which are not as effective. Combined that with -- there are some hiccups in particularly first two months around with our cloud transformation, we had some incidences. So, I would say, overall, what we have seen in first two months, I don't think it's a sub-reflection we will have in March. But given our business complexity, so for example, I can tell you in our verticals, within local as well, it's not one that fits all. So for example, things to do, it's coming back really strong for. But our health business beauty is also at par level or sometimes below level and this trend goes up and down in some particular cases. That said, March performance for the ones which we are focused on, which is basically the factor we have mentioned in our sales strategy to bring on new merchants, that's the exact point where we are trying to see that do we get actually the response when you bring on the merchant and is that a better response. And so far what we have seen is much, much better in terms of when we are very focused on bringing the targeted merchants as well as trying to reduce the retention -- sorry, attrition of our merchants. And going just to complete that particular statement, our criteria is very simple, if you can sell 10 or more watches per month, that's kind of merchant we want to have, at least if we are using our sales force. And what we have seen is that, that particular factor compared to our, what we closed the merchants last year has grown dramatically up.

Thank you. [Operator Instructions] And ladies and gentlemen, it appears we have no further questions this afternoon. So, we would like to thank you all for joining Groupon's fourth quarter 2022 financial results conference call. We'd like to wish you all so much a great evening. Goodbye.