Good day, everyone, and welcome to Groupon's Second Quarter 2022 Financial Results Conference Call. 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.

Hello, and welcome to Groupon's Second Quarter 2022 Financial Results Conference Call. On the call today are CEO, Kedar Deshpande; and Interim CFO, Damien Schmitz. The following discussion and responses to your questions reflect management's views as of today, August 9, 2022 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, 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. And with that, I'm happy to turn the call over to Kedar.

Hello, and thanks for joining us. We delivered local billings of $361 million, up 5% from the first quarter. While we have stabilized the business, we are still not stimulating the customer engagement we need to grow the business. And as a result, our customer retention and purchase frequency metrics are not where we want them to be. Bottom line, our overall performance is not at the levels we anticipated, and we know we must do better. On the merchant side of our marketplace, macro headwinds have persisted. Labor availability is still constrained and many merchants with limited capacity have been able to raise prices. This means that these merchants have not needed discounts to bring customers through their doors, so many merchants are not leveraging the Groupon marketplace to sell discounted inventory as they have in the past. On the other side of our marketplace, we haven't yet seen consumers widely trading down to discount channels, and with our purposeful pullback in marketing spend, both traffic and customer counts have been impacted. While these factors are a headwind to our performance today, we believe that Groupon should benefit if the economy continues to decelerate and merchants and customers need to lean into discount channels. And we believe we are executing a plan that will surmount all of these headwinds. Groupon was founded in the midst of the great recession. And we believe that we are taking the right steps to fundamentally reposition our business to grow profitably in a variety of economic cycles, including a potential recession. We believe we can do more to shape those factors that are within our control. We must lower our cost structure and build a more engaging marketplace experience. Today, you will hear us talk about the actions we are taking and how we are moving with a sense of urgency. As we have told you, our turnaround strategy is focused on two areas: reducing our cost structure and fundamentally improving our core marketplace experience. Let me walk you through the progress we are making in both of these areas. First, with cost cutting. We have begun executing a multiphase cost savings plan. In phase 1, we expect to reduce our cost structure by $150 million annually. To do this, we are redesigning our cost base to better align with where our business is today. This is allowing us to reduce current costs, but even more importantly, we are creating expense leverage to drive more profitability. This means that our new cost structure should be able to support significant future growth. This will be foundational for long-term success. As we execute on our turnaround strategy, a lower fixed cost base should provide us with significant operating leverage and support sustained positive free cash flow going forward. This redesign is built on the work that our team has been doing over the last three months to challenge our current processes and automate how we work. This will allow us to take costs out of the business and improve productivity. Our plan includes both nonpayroll and payroll reductions with about two-thirds of our phase 1 savings coming from reductions in payroll. First, we are reducing the size of our North America sales force. As we have discussed over the past year or so, we have significantly improved our self-service platform for merchants, and year-to-date, over 60% of our merchants in North America are using self-service. We believe we can leverage self-service even more broadly to both service our existing merchants and acquire new ones, and we believe we can do so while generating higher ROI. In fact, while it's still early, we have seen more than 2x ROI improvement using our paid marketing channels to acquire new merchants versus our sales force. Second, with the new CTO in charge of our tech organization, we are aggressively rightsizing our tech organization to align with our current and future business needs. We are doing this on both payroll and nonpayroll side. We intend to reduce our cost by approximately $60 million or nearly 30% of our annual technology expenses. A substantial part of our organization has been dedicated to our move to the cloud. So once this project is completed later this year, we intend to reduce our tech footprint even further. We are also exploring future opportunities to reduce the number of services we support and save even more in the years ahead. The remaining cost savings will come through a combination of process improvements and the rightsizing of our facilities footprint to reflect our new hybrid work environment. The majority of these cost actions will happen this year. However, as I mentioned earlier, this is just the starting point. We will continue to optimize our cost footprint to ensure it is aligned with the size of our current business, particularly within our organization while still giving us room to grow. Damien will walk you through the financial implications for this year and next. The second prong of our plan is focused on improving our core marketplace to drive purchase frequency and improve customer retention. By orienting our marketplace around serving everyday customer problems rather than just focusing on discounts, I believe we can improve Groupon's everyday use case. To do this, we are testing ways to grow our inventory density quickly and improve our customer experience. This quarter, we introduced a number of initiatives aimed at ensuring we have the right inventory to meet customer demand and that we have the right experience to keep customers engaged. To put this opportunity into perspective, just considering our current North America local customer base, if we were able to return to the customer frequency and retention levels we saw in 2018 and 2019 time frame, we could capture nearly $250 million in incremental revenue. And that, in our opinion, would be just the starting point for our current customer base. So let's talk about what we have accomplished so far and what we intend to do, starting with fixing our customer experience. We have made substantial progress to ensure customers are able to trust that they will have a positive experience every time they come to Groupon marketplace. When customers come to our marketplace in search of a deal on something, they have to be able to trust that we offer the best deal. They should know that they can't find a better deal from the merchant directly or from another platform. So we reviewed our pricing in North America and put a process in place to improve our ability to monitor pricing. Customers should be able to trust that whenever they purchase on Groupon, they will be able to use and have a great experience. We have removed high refunding merchants from our platform and are piloting a program to proactively identify and help those merchants with degrading refund trends. Our goal is to help these merchants before they become a customer problem. We want to only work with those merchant partners that we feel confident can provide our customers with a good experience. As a result of this hard work, we have been able to reduce refund rates by approximately 5% compared to the first quarter in North America Local. We expect continued improvement going forward. We have also done a lot of testing to figure out how we can increase purchase frequency by making existing customers aware of what else they can buy on Groupon. We had a significant win here in North America. In our experiment to encourage cross-vertical purchases, we leveraged personalized promotions to entice customers who bought within the dining vertical to make a purchase of various Beauty & Wellness experiences and vice versa. Early results were exciting. In a test with 5,000 customers, we were able to grow cross-vertical purchases by more than 150% versus a control group. These results gave us the signal we needed to begin scaling this initiative in North America and internationally throughout the third quarter. We believe the potential impact could be meaningful in the future. Let's get into how we are improving our inventory density. We have to be able to surface inventory that is engaging and meets the needs of customers every single time they come to our marketplace. This is how we satisfy intent. How will we do this? Our current priorities include creating more opportunities for our customers to buy from Groupon by giving them a broader selection of everyday services and experiences that they are looking for. To do this, we are working across a few fronts. First, we are rethinking card-linked offers. We are partnering with a leading card-linked offer provider in the food and dining space, which will triple our high-frequency dining inventory in North America in the third quarter. Let me repeat: triple. Second, we are working to ensure we have breadth and depth of inventory for our local experiences and services in any given geography so customers know to come to Groupon first, that we will have what they want. Going forward, our supply acquisition efforts will be focused on building the supply coverage across all of our verticals. Our inventory density efforts will be led by a focus on giving customers what they are looking for, more frequently and not just generating margin growth. For example, we won't direct our sales team to add a fourth or fifth massage in any given area, but instead, have them focus on acquiring inventory where we don't have adequate coverage. This may be inventory that customers use in their daily life, such as haircuts, car washes or even a trampoline park. And this is how we will round out the breadth of our inventory selection. Finally, we are experimenting with ways to drive better conversion and monetization of market rate inventory we have through various partnerships, including inventory like movie theaters and concert tickets. We are making changes to our algorithm to surface this inventory when we know it will satisfy our customers' intent. To see how our efforts on both sides of our marketplace will come together, we are running a number of these experiments I have highlighted in one test city, Atlanta. Together, we believe these efforts can supercharge unit velocity, increase customer retention and grow traffic. Our goal in Atlanta is to improve our customer purchase frequency by greater than 20%. If we are successful, we would scale as quickly as possible to other cities. As we fix our core business, marketing will play a key role in retaining and bringing new customers to our platform. Over the past several months, we have been focused on creating and kicking off a plan to fundamentally improve our marketplace offering. Given the operational progress we have made as well as the savings we have identified, we are now in a position to increase our marketing investment to drive growth. As part of our organization-wide efforts to increase productivity, our marketing team has identified several opportunities for reallocation and optimization across performance marketing channels to unlock incremental ROI. Since the end of July, we have more than doubled our budget for search engine marketing. While it is incredibly early, we have seen more than 80% return on this incremental spend. Additionally, we are also seeing a positive impact on local customer acquisitions and reactivations. We also expect this spend to help drive improvements in marketplace awareness and traffic trends. Based on the signals, we will be investing in a new performance channel marketing strategy to improve traffic trends. Finally, before I turn the call over to Damien to review our second quarter financial results, I want to give you a quick update on our progress toward differentiating our inventory. As we discussed last quarter, we have two opportunities that we are pursuing. First, we are launching curated inventory collections. We are creating uniquely packaged deals that offer customer solutions for everyday occasions and will drive engagement, encourage cross-vertical shopping and remove friction for customers looking for complementary services and experiences. In mid-July, we started with two small tests of this concept in the Chicago and U.K. markets. We have launched several date night and weekend adventure deals. The goal of this test is to learn how users engage with this inventory. Going forward, we will continue to refine and begin marketing these collections. As we discussed last quarter, we are also planning to launch a stand-alone marketplace for Beauty & Wellness experiences to extend our competitive position as a destination for local experiences. We intend to launch a test of this concept by the end of 2022. All of this work, including the redesign of our cost structure, should position us to begin capturing new growth opportunities as we exit 2022, allowing us to grow in a variety of economic cycles. We expect to return to cash flow generation in the fourth quarter of this year and to be able to deliver a sustained 15% to 20% adjusted EBITDA margin and a minimum of $100 million in free cash flow in the full year of 2023. With that, I will turn it over to Damien to walk you through our Q2 results.

Thanks, Kedar, and thanks to everyone who's joining us today. I'll use my time today to provide further insights into our second quarter operating financial results, factors to consider for the third quarter, and details on our plan for reducing our cost structure. In addition to my prepared remarks, I encourage you to review our slides, press release and 10-Q, which contain more detail on our Q2 results. Starting with our consolidated second quarter results. We delivered $460 million of gross billings, $153 million of revenue, $134 million of gross profit and $6 million of adjusted EBITDA. We ended the quarter with $316 million in cash, including $60 million drawn on our revolver. As Kedar mentioned, we are beginning to see some stability in our local category. However, we're not happy with where our business is today, and we're taking decisive steps to address our challenges. So let me walk you through our second quarter results, business drivers and trends, starting with our local category. During the quarter, local billings recovery rates were up 3 percentage points versus the first quarter and were at 52% of 2019 levels. Additionally, refund levels were down sequentially versus the first quarter due in part to our proactive outreach efforts to our merchant partners with higher than average refund levels. We expect to see further improvement in refund levels going forward. We ended the quarter with approximately 21 million active customers worldwide. Within our North America customer base, we had 10.5 million active local customers in the second quarter, up 1% year-over-year. Within our international markets, we had 5 million active local customers in the second quarter, which represented a growth of 22% year-over-year. This growth in local customers partially offset the decline in our lower-value goods customers during the quarter. Moving to our goods category. In the second quarter, billings were $61 million, down 15% compared with the first quarter and below our expectations. As a reminder, we completed the International Goods transition to a third-party marketplace model in the fourth quarter of 2021, which means we recognize goods revenue on a net basis. Turning to operating expenses. SG&A was $124 million, down 10% compared with the prior year, primarily driven by lower payroll costs, which was partially offset by higher cloud costs as we continue to migrate our on-premise data center environment to the cloud. Marketing expense was $29 million in the second quarter or 22% of gross profit, a decline compared to prior quarter levels. You heard Kedar talk about our plan to lean into marketing to stimulate customer engagement consideration. This will translate into an increase in marketing as a percent of gross profit for the remainder of 2022. When we begin to see results from our work to fix our core marketplace, we expect to lean further into marketing to amplify our organic traction. Turning to our cash position. In the second quarter, we saw a cash outflow of $87 million, which includes $40 million repayment on our revolving credit facility. As a result, we ended the quarter with a cash balance of $316 million, which includes $60 million drawn on the revolver. Additionally, during the third quarter, SumUp successfully completed a funding round, and as a result, Groupon now holds a 2.29% equity stake in the privately held global payments provider. Keep in mind that while there's no public market for SumUp securities at this time, if an opportunity arises to monetize this asset, we would consider actions that we believe would unlock shareholder value. As you've heard from us today, we are aggressively cutting costs, which will strengthen our balance sheet. Between our assets and the more flexible and streamlined cost structure we're creating, we believe we have the resources we need to execute our turnaround strategy and sustainably deliver free cash flow beginning in the fourth quarter of 2022. To help with your models, we put together a slide in our earnings presentation to show how savings from our cost program are expected to translate to our P&L over the next several quarters. Let me walk you through some of the highlights. Our plan is to achieve approximately $150 million run rate savings by the end of 2023, and we are moving fast to unlock nearly $100 million in annual run rate savings by the end of 2022. These savings will start showing up in the fourth quarter but will be partially offset by cloud and other transition expenses. In addition, we'll also incur $10 million to $20 million of pretax charges in the third quarter in connection with our savings plan, which will be adjusted out from EBITDA. Net-net, our SG&A in the second half of 2022 will be lower than the first half of the year by approximately $10 million. So you should anticipate the balance of the savings will show up in 2023 P&L and cash flow. Given we are in the midst of executing our turnaround strategy, combined with an uncertain macroeconomic environment, we are withdrawing our previously issued full year 2022 revenue and adjusted EBITDA guidance. In light of this, we are providing more details on anticipated drivers of our third quarter performance. Here are some of the factors to consider for the third quarter of 2022. July local billings were approximately 50% of 2019 levels as they were impacted by the lack of seasonal inventory. However, since we began leaning into marketing at the end of July, we've seen North America local billings tick up a few points as a percent of 2019. Keep in mind that this data point is very early. We expect third quarter adjusted EBITDA to be lower than the second quarter, given the timing to execute our cost actions and additional marketing spend. And we expect to see typical seasonal cash flow patterns play out in the third quarter, which means we expect to be in a cash burn position in the third quarter. Beyond 2022, we will continue to focus on creating shareholder value and believe that we're taking the right steps now that position Groupon for the long term. We are reiterating our targets for full year 2023, which include $100 million in annual free cash flow and 15% to 20% adjusted EBITDA margin. Our goal is to generate positive free cash flow every quarter starting in Q4, and we believe that the business model we are creating will allow us to do so. Finally, while we are still evaluating savings that we could potentially capture beyond the first phase reductions, we believe there is additional opportunity to further reduce our cost structure by approximately $50 million in cash savings over time. We intend to identify the plan to capture these savings by the end of next year. We believe this improved cost structure will allow us to drive long-term profitable growth and allow us to deliver a financial model that puts us in the same league as other successful tech companies. With that, I'll turn it back over to Kedar for a few final prepared comments.

Thanks, Damien. Last quarter, we told you that our priorities were to reduce cost with an eye towards creating expense leverage and to improve our marketplace offering by both fixing our core and creating new growth opportunities through differentiated inventory. Over the past three months, we have made important progress. We kicked off a plan to reduce our cost structure by $150 million, which we believe will create a much more flexible foundation to support sustainable, profitable growth. We made substantial progress fixing our core marketplace by improving the customer experience. We launched new targeted promotional programs to encourage cross-shopping across multiple inventory verticals. We are ensuring that customers are able to trust that we are offering them the best deal and that they will have a positive experience every time they come to the Groupon marketplace. We also launched curated inventory collections and have a plan to launch a test of our new Beauty & Wellness marketplace by the end of the year. And now with these fundamental improvements to our marketplace deployed, we have begun leaning into marketing to drive growth. Finally, I'm so grateful to our entire organization that is continuing to move forward with a sense of urgency to deliver on our most important work. The actions we announced today are a difficult message to communicate to those teammates we are saying goodbye to. But they were necessary to our ability to make the progress and live up to our potential. So a big thank you to the entire team here at Groupon. We believe the turnaround strategy we have in place will allow us to fundamentally reposition our business to grow profitably in a variety of economic cycles. With that, I will turn it over to the operator for your questions.

Our first question will come from Trevor Young with Barclays.

A few, if I may. Kedar, you flagged efforts to unlock inventory, some big unlock with the dining card-linked offer, but it sounds like maybe more work to be done to get the right inventory in the right categories and the right geos. Meanwhile, you're beginning to lean in on that performance marketing to get the customer flywheel going. Which is really the gating factor here to get that flywheel going? Is it the customers or inventory or is it both? That's my first question.

Thanks for the question. I think the first factor is always, which one is the first, right, like customers or inventory? In my mind, right now, we have sufficient inventory for our existing customers, and we have fixed some of those particular gaps we have in our marketplace from an experience perspective, like we talked about refunds being decreasing. That was one of the major headwinds for us. If customers could not utilize, then they would not come back no matter how good of inventory we have on our marketplace. And so we fixed some of the core experience issues, and to drive the repeat engagement, we need to have more inventory of a daily use case, and that's what we are focused on. So I would say we are leaning into marketing. With our existing inventory, we will have much better customer response, but that particular customer response to continue that engagement in our marketplace, we need more everyday selection. Card-linked offers is one set of that. We are trying to drive a lot of third-party inventory that we typically earlier only surfaced in our search experience. Now we are surfacing in different parts of our engagement funnel. Overall, we believe that not only just acquiring is only part of this equation, but also surfacing that inventory in our right customer experience is part of this particular strategy.

That's really clear. Damien, just more of a housekeeping one. SumUp, the updated ownership at $8.5 billion, EV would apply the stakes worth about $195 million. But in the 10-Q, it looks like the carry value of other equity investments remain static. Maybe there's some debt at SumUp that's kind of impacting the equity value. But just trying to reconcile that carry value versus the new stamp on SumUp.

Trevor, thanks for the question. And I'll get to that. But first, congratulations to the SumUp team there for raising capital in this landscape. It's really a testament to the strength of our business and the operating progress that they're seeing, so it's a great investment here for Groupon. Post equity round, we now hold a 2.29% equity stake. Given the nature of the way that transaction was structured in their fundraising round, under the applicable accounting rules, it didn't qualify observable price change, which is why you see us keep it at the same level on the balance sheet today.

Okay, got it. And then just last one, if I may. Just on paying down the $40 million on the revolver, just given current cash flow and then the uncertain macro. What was the rationale there? And post quarter, is that $225 million revolver still available to you or any changes there?

Yes. There are a couple of factors involved here, Trevor. First, we're paying interest on a liquidity resource that we weren't really utilizing. Second, due to our EBITDA performance, we don't have full access to the revolver. However, as you heard today, we are focused on cost reductions and are quickly implementing our plan to transform our marketplace. We believe that by the fourth quarter, we will be in a sustainable position to generate positive free cash flow, which means we will be generating cash from our core business.

Our next question will come from Eric Sheridan with Goldman Sachs.

If we could revisit Slide 13, where you presented the idea of improving the marketplace experience, could you provide some clarity on customer experience, inventory density, and differentiating inventory? How should we consider the timing of these initiatives? Will they all be implemented simultaneously? What should we expect in terms of financial investment to carry out these changes in the marketplace experience? When will we start seeing the impact on purchasing frequency and customer retention? Will that happen in the second half of 2023 or as we exit 2023? How do we align these initiatives with the timeline for their execution? Additionally, regarding the SumUp stake, can you share your thoughts on the priority of capital if you decide to monetize that stake? How do you weigh the options between returning capital to shareholders and pursuing more aggressive investments in the business, including potential inorganic growth through mergers and acquisitions?

Thank you, Eric. I'll address the first question, and Damien will take the next one. Let me start by discussing our efforts to enhance our marketplace. Our goal is to establish ourselves as the go-to destination for everyday services for our customers. Currently, customers are having a positive experience, and we are working on ensuring we have the right fundamentals in place, such as managing our refund rate and building pricing confidence. These initiatives are either completed or underway. As for improving inventory density, we are making progress, starting from a single city. The advantage of our marketplace model is that we can concentrate on one geographic area, assess the results, and then decide whether to scale nationally or internationally based on what works. We are specifically focused on improving inventory density in Atlanta, and we expect to share some results in our Q4 call. From there, we can determine whether to expand or refine specific initiatives. In terms of marketing, we have already initiated efforts because we believe our marketplace experience is significantly better for our customers. We are also enhancing our inventory, not just in Chicago but in UK markets as well, where we are receiving a positive response to differentiated packages. All these efforts are occurring simultaneously, alongside increasing customer awareness of these unique experiences in our marketplace through cross-selling. We aim to update you on our progress as soon as possible. While I can't specify whether these updates will come in the first or second half of 2023, our immediate focus is to get this right in Atlanta, and we will provide further updates in Q4.

And then on your second question there on SumUp. I think what you heard from our comments today is it's a fantastic asset for Groupon to have. But it is noncore and we'd definitely be looking to monetize in the future if and when it makes sense to do so. The key there, trying to understand how we intend to deploy that capital, we're really going to be evaluating where we're at in this turnaround journey, whether it makes sense to deploy investments towards accelerating our growth, whether in marketing or inorganically, M&A or returning value to shareholders. So we're really going to be evaluating what is the best use of that capital from an ROI standpoint. But too early to comment on that, but just know that we intend to use that in the way that makes the most sense.

And that will conclude today's conference. Thank you for your participation, and you may now disconnect.