Groupon, Inc. Q3 FY2025 Earnings Call

Hello, and welcome to Groupon's Third Quarter 2025 Financial Results Conference Call. On the call today are Chief Executive Officer, Dusan Senkypl; and Chief Financial Officer, Rana Kashyap. The company has posted earnings materials, including earnings commentary on the company's Investor Relations website at investor.groupon.com. Today's conference call is being recorded. Before we begin, Groupon would like to remind listeners that the following discussion and responses to questions reflect management's views as of today, November 7, 2025, only, and will include forward-looking statements. Actual results may differ materially from those expressed or implied in the company's forward-looking statements. Groupon undertakes no obligation to update these forward-looking statements as a result of new information or future events. Additional information about risks and other factors that could potentially impact the company's financial results are included in its earnings press release and its filings with the SEC, including its quarterly report on Form 10-Q. We encourage investors to use Groupon's 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 and furnishes with the SEC, corporate governance information and select press releases and social media postings. In the call today, the company will also discuss the following non-GAAP financial measures: Adjusted EBITDA and free cash flow. In Groupon's press release and their filings with the SEC, each of which is posted on its Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable measures under U.S. GAAP. And with that, I'd like to turn it over to Dusan, to make a few opening remarks before we jump into Q&A. Dusan?

Hello, and thanks for joining us for our first quarter 2025 earnings call. It's great to be with all of you today. Yesterday, after the market closed, we released our earnings and posted our earnings commentary on our Investor Relations website. Today, I will make brief opening remarks and then open up the call for your questions. For more details on our quarterly performance, I encourage you to read our full earnings commentary, press release and 10-Q. I'm pleased to report another strong quarter that demonstrates continued momentum in our transformation journey. Global billings grew 11% year-over-year, making our second straight quarter of double-digit growth. Our core local category continues to be the engine driving this growth with North America local up 18% and international local, excluding Giftcloud, up 15% year-over-year. Combined, our core local category now represents 89% of billings and grew 18%, reinforcing the scalability of our hyperlocal marketplace playbook. We delivered adjusted EBITDA of $18 million, ahead of our expectations, and our trailing 12 months free cash flow reached $60 million. This demonstrates our ability to generate strong profitability and cash flow while continuing to invest strategically to accelerate our top line. On the demand side, Q3 reflects the compounding benefits of systematic improvements across our marketing engine. We drove healthy growth in our paid market performance channels, supported by a modest increase in marketing spend and improving ROI. We added nearly 300,000 net new active customers quarter-over-quarter and over 1 million in the last four quarters, excluding Italy, a strong signal for the overall health of our marketplace. On the supply side, our hyperlocal focus is working. All four major international markets delivered a second consecutive quarter of double-digit growth. In North America, our focused hyperlocal city strategy is paying off. Chicago is now our biggest city and growing at nearly double the rate of North America local overall. Things to do had an exceptional summer season with its seventh consecutive quarters of strong double-digit growth. On the technology front, our platform velocity is accelerating meaningfully. Deal page conversion rates improved 13% year-over-year in North America, and we are seeing faster development cycles and higher quality releases as our modernization efforts translate into tangible business capabilities. Looking ahead, our strategic priorities remain clear, accelerate top line growth towards our goal of over 20% billings growth while generating strong adjusted EBITDA and free cash flow. The momentum we are seeing across customer growth, category performance and platform capability gives me confidence that we are building the foundation to become the trusted destination for quality local experiences at unbeatable value. We are still in the early innings of a large opportunity to build a hyperlocal experience marketplace that combines trust, curation, quality and unbeatable value with the network effects and unit economics of modern marketplaces. I would like to thank our team. This is not an easy journey and their continued commitment to our mission and to our transformation has been really great. With that, let's open the call for questions.

Our first question comes from Bobby Brooks from Northland Capital.

Something that really caught my attention was the commentary that after allocating the focused sales resources to Chicago at the start of the year, it's now growing double the rate of North American local. So just a few questions on that. But first, is it right for me to then think that Chicago local billings was growing in the high 30s? And a follow-up, could you just discuss a bit more in detail what those focused sales resources look like and the notable actions they took?

Thank you for your question. I can address that. We began our efforts in Chicago last year by reallocating a larger share of our sales resources and team to the city. At the same time, we have been enhancing our understanding of the marketplace and developing our sales approach, which allows us to be more precise in our strategies. Chicago is our top priority, enabling us to grasp the inventory better, identify gaps, and understand customer behavior and searches on Groupon. We're focusing on closing these gaps, but it takes several quarters for results to show in our numbers. However, we are observing a significant positive impact on Chicago's results as the effects compound. This is a valuable learning experience for us, and it aligns with our expectations. We are also broadening our focus to additional cities and enhancing our marketplace understanding across all sales processes at Groupon to establish a new standard.

Got it. That's very helpful information. It seems like you're already in the process of expanding this playbook to other cities. For context, you mentioned that you initially increased sales resources in Chicago last year. Was that about four or five quarters ago? I'm trying to understand when we might start seeing the impact of this approach in other cities and how it's reflected in the results since I know there is a time lag involved.

Yes. We were iterating the process, but you can think about it that we started approximately four quarters ago. With all new metros, we would like to see results faster because we have learnings, and it was also a process where we were improving pretty much every quarter and changing and fine-tuning the approach. So it should be faster with other metros.

Got it. That makes sense. And then one more for me is just clearly got the sense of your focus of making a customer journey kind of match a customer in the prepared remarks last night; I think you used the example of someone wanting to take their kids to a water park is going to be different than someone looking for an oil change. And so I'm just curious how do you plan on having Groupon kind of provide a different customer journey? And I'm just curious what that different customer journey would look like?

I would break this down into two main parts. First, there has been a significant shift in mindset at Groupon over the last six to twelve months. Previously, we treated the marketplace as a single product and ran numerous tests without fully understanding the outcomes. Recently, especially with new leadership in the product department, we've changed our strategy to focus on results and tests within specific categories. For instance, our new map feature is valuable in certain categories but completely irrelevant in others. In the past, if a new app didn't meet our expectations, we would discard it without considering its category-specific impact. Now, we recognize that for an oil change, the map feature is highly relevant, while in other categories it may not be necessary. This category-specific approach in product development is transforming customer experiences. The second crucial initiative for us is the Customer Data Platform or CRM for our customers. We are currently piloting this new technology in the U.K., which will allow us to tailor messaging more effectively. Our previous technology was quite restrictive in terms of customer targeting and personalization. We are making changes to optimize the experience based on individual customer behavior on the website. Every user journey will be designed to align with the specific profile of the user. During internal demonstrations, we observed that Groupon could look entirely different for each customer based solely on their profile.

Our next question comes from Eric Sheridan from Goldman Sachs.

Maybe two, if I could. Building on parts of the last answer, when you think about purchase frequency, which you call out the difference in behavior between newer cohorts versus older cohorts, can you go a little bit deeper in some of the initiatives aimed at improving frequency among the newer cohorts against the type of user growth you've seen over the last 12 months? That would be number one. And then number two, when you think about the next 12 to 18 months and the intensity around marketing, how do you think about striking a balance between more direct response marketing aimed at either user acquisition or behavior against scaling from the brand advertising you talked about in the shareholder materials, just so we better understand the combined effort on marketing intensity over the next 12 to 18 months?

Thank you very much for both questions, Eric. We are kind of interconnected. And I will start with purchase frequency and will be building on the last answer. We were talking about purchase frequency as a focus for the company probably the last three or four quarters. Yet we are reporting that we don't see material improvements. Internally, we see improvements in the repurchase rate of the cohort of new customers when we compare customers that we were acquiring last year versus customers that we acquire right now and look at what percentage of them is doing the second purchase typically within 30 days from the first one, we see improvement. So we know that the activities and plans we have are directionally right. What's holding us back is really the tech limitation of our platform. And that's why I was talking about the Customer Data Platform project implementation, which we have up and running in the U.K. and we will be expanding it very soon to the rest of Groupon, particularly North America, which would really allow us to design the specific journeys based on what customers did because we see that we are simply category-specific rules; our customers are buying items that can be predicted, meaning that if you buy an oil change now, we know that most likely you will need it in the next nine months and similar. Right now, we don't have the targeting capabilities. So this technology enabler is, I would say, the last major big missing piece in the marketing stack, which we have, so that we can accelerate on purchase frequency. And on the second part on brand advertising in general, it's very hard to predict how exactly we will be running it, but we simply have based on our experience, we know that brand is part of the marketing mix and especially nowadays when the world is moving towards social media influencers, this is a channel that can drive business significantly. We were piloting and have some great influencers promoting Groupon, I would say over the last four, five quarters, and we are successfully growing it. But now we are adding video advertising, YouTube and other channels where we can push brand content. It's very hard to say how it will impact ROIs. Overall, we don't plan to change our strategy to grow the contribution of profit in the company. At the same time, if we see that the brand is delivering more than we were expecting, we would be adjusting the budgets between performance and brand advertising. But we will come back with more data in the next earnings call because our brand campaign starts in two weeks.

Our next question comes from Bobby Brooks from Northland Capital Partners.

I wanted to revisit the change in perspective regarding the buyback mentioned in the prepared remarks last night compared to the second quarter call. I'm curious if you could provide more insight into the factors that will be considered when deciding when to initiate the buyback. Additionally, any general guidance on how we should approach or model this moving forward would be appreciated.

Yes, Bobby, this is Rana. I can address this. You rightly pointed out the difference in our commentary compared to the past. Previously, our statements were somewhat noncommittal. However, what we've indicated now is that we plan to be opportunistic. We are assessing various factors, including our cash generation, investment priorities, market conditions, and the trading prices of our shares. Therefore, we will approach the buyback opportunistically, taking these factors into account as we determine how to allocate our capital in this area.

Got it. That's helpful. And then I just wanted to follow up, Dusan. I think with the customer frequency of the new cohort, I just want to make sure I understood it right. You mentioned that the new cohorts added in 2025, their purchase frequency is higher than the cohorts added in 2024, albeit that the 2025 new customers are still below the legacy customers. Am I understanding that correctly?

On the operational level, so that we can drive these projects in a very agile way, we are pretty much following the, let's say, repurchase rate in the next 30 days, meaning when a new customer makes an order, we are looking at what percentage of these customers are doing the second order within the 30-day interval because it's a leading indicator for the purchase frequency. And we can see based on the changes in projects which we started already in Q4 last year that there is improvement in this group. So this makes me strongly convinced that the projects which we have in place are the right ones, that they will be working. It's about adding right inventory. We were talking about WOW Deals, but it's also about the communication at the right moment, right time, which is typically when the customer is redeeming and using the service, which typically means a very good experience with Groupon. They are more open to the next purchase. So this is confirmed to ramp it up. And so it's converted in the overall user base. We simply need to also step up with better technology so that we can target and personalize in a more advanced way.

Our next question comes from Sean McGowan from ROTH Capital Partners.

Kind of following up on some of the things you've talked about there. You've been now doing for quite a while, reminding consumers of expiring Groupons and encouraging them to redeem them. Can you talk a little bit about what impact you've noticed on their purchase patterns, how likely they are to purchase an additional Groupon?

Thank you, Sean, for the question. I am not able to share the exact numbers, but our analysis shows that when the customer redeems, we simply have a much higher rate of the second purchase. And this is a project which we were talking about since last year. It takes a little bit more time versus what we were expecting because of the way how some Groupons are redeemed since with some merchants, we don't even have a redemption signal. So we have to do plenty of background work to improve the system and collect more inputs and signals from our merchant partners. But this is one of our priority projects. We will also be improving and expanding our review section, which is very highly related to the overall topic, and we will expect that it will translate into repurchase rate overall for all Groupon customers.

Okay. And Rana, a quick kind of housekeeping question. I think you mentioned in the prepared remarks that the ex-Giftcloud International billings were up 15%. Can you translate that into what the revenue growth would have been at ex-Giftcloud?

So ex-Giftcloud, our revenue growth in Italy was up 7.6%, so I think about 8%.

Okay. Then back to you, Dusan. Quite a bit in the prepared remarks about AI. Can you give a little bit more color on what some of the benefits you're expecting to see from greater use of AI?

There are benefits in how we are operating the company, and we also see opportunities with customers. To begin, let's discuss SG&A opportunities. AI is becoming a key factor in improving our sales team's conversion rates. We are enhancing our lead generation capabilities and utilizing a system that provides insights into which businesses and deals we need in specific areas. This will allow us to deliver higher quality leads to our sales team, leading to increased revenue compared to the lower quality leads we had previously. We are incorporating AI into our communication with merchants to present Groupon, and we are adding AI tools throughout the sales process. For example, with AI deal creation, we find that showing merchants how their deal will appear on Groupon during sales calls not only speeds up the process but also boosts conversion rates. AI is also being used for supply monitoring, offering deal insights and guiding salespeople on how to enhance deals for better outcomes for both merchants and us. Engineering efforts are focused on achieving higher efficiency and quality across the board, including finance and marketing. I anticipate that we can grow performance marketing and social and influencer marketing with the same or a smaller team. Recently, we introduced a chatbot for customer service, which we now see as an advertising channel that connects us with customers. This AI-driven chatbot manages initial communications, while our agents use AI to navigate conversations and handle parts of the dialogue. On the customer side, I expect changes in behavior regarding how customers search for services, although this transition will unfold more slowly than anticipated. We are working closely with partners to prepare for AI applications, ensuring our website is accessible and optimizing for AI-driven traffic by identifying key keywords. As this develops, we believe that customer searches will become more conversational, with Groupon playing a significant role. Ultimately, I envision Groupon as a gateway for small businesses that may struggle to adapt to the AI landscape independently. We aim to connect them with platforms that will integrate local merchants into the AI ecosystem.

We'll now pose written questions to management that came in through our Investor Relations press line. Investors who are live on the line, if you have follow-ups, please raise your hand and we'll head back to you. Our first written question is in regards to marketing efficiency. Marketing spend rose 14% year-over-year to 37% of gross profit as you leaned into acquisition. How are you measuring marketing ROI across channels? And what early learnings are emerging from your new brand campaign in key markets like New York and Chicago?

I can take that question. So first, the brand campaign is starting in the next two weeks. So we don't have a lot of learnings from our own. Obviously, we were doing the homework and we were looking at how other companies were running brand campaigns to take the learnings. So we have positive expectations of the outcome. And in terms of performance of our marketing channels, based on the numbers we were reporting, you can see that our paid marketing channels are performing very well. We have a very good ROI. We are not changing our ROI goal of like 100% return within the seven-day window for all our performance marketing budget. With this setup, although based on the results which Google and Meta are posting, you see that we are able to monetize better their traffic. We are still able to grow and improve the marketing with the exactly same ROI, which I consider a great result. Based on the additional AI opportunities, I believe we still have a way to go. We still can grow the video part, the social part of the marketing. So I believe that part of our future growth will be coming from this area. And maybe one additional comment on this. At the same time, we see a shift in customer behavior. We see that the AI pieces mainly by Google are decreasing traffic coming from SEO. At the same time, we see higher conversion. So SEO overall for everyone, it's not just a Groupon-specific topic, is definitely a headwind. But at the same time, we see opportunities with conversion and opportunities with AI, which will balance it.

Our next written question is in regards to platform modernization. Your new app remains at roughly 3% of traffic with plans for a full North American cutover by early Q1 2026. What KPIs are you watching to gauge readiness for the full migration? And what incremental uplift in conversion or engagement have you seen from early adopters?

I'm happy to report that in recent weeks, we see quite major improvements, and that's why we are more optimistic with the rollout of the platform. The biggest learning and takeaway from the app is that new mobile app users have 10% to 20% higher engagement, which means that because the app is easy to use, we are simply coming back to the application, relaunching it, and looking what's available on Groupon more than customers using the legacy application. At the same time, it's not converted yet into conversion. The monetization is pretty much on par. That's why we decided that we will be ramping up the distribution for new users already now in Q4, and we will really accelerate it in early Q1 because we feel much more confident about the outperformance right now. The second part to this question is related again to the Customer Data Platform, which would allow us to deliver personalized messaging because this is a tool to improve experience for customers, delivering them push notifications and in-app messages, which will be more relevant. We see this as an opportunity for us for next year.

We have a follow-up question from Sean from ROTH Capital.

Yes, I noticed that last quarter and this quarter as well, travel seems to be doing better. So can you talk about some of the things that you're doing in travel that seem to be working?

Yes, you correctly noted, our travel business has been doing well. Our travel business is still relatively small relative to the market opportunity and our business. We have had success this summer working with several large enterprise brands in travel that really fit with our proposition. And so what we've been doing there, these are actually existing customers that we're growing faster with, and we've been working closely with them to understand their needs and designing solutions that meet customer needs and introducing more room nights, better deals. That's been really successful. These properties also overlaid with many of the outdoor activities for the summer. So that also lines up well with our platform of offering things to do and experiences. And so that's really what drove travel this summer.

And another follow-up from Bobby from Northland.

One more for me. So obviously, a lot of discussion on the AI initiatives and where you see the opportunity there. But I guess I was just curious from the customer-facing perspective, is there anything as folks are checking out the website and looking for deals in the coming months, are any of these kind of AI initiatives going to be able to be directly seen when browsing inventory on the website or maybe through the app, whether it's the legacy or the new rollout one? Just curious to hear that color.

So one internal project we are running in this area is also really an updated version of the search and relevance platform for the entire Groupon, which would allow us to unlock better opportunities, more personalization in general, in line with what I was talking about in the CRM project as well. The plan is that when we have this platform released, we will be adding AI search on the Groupon platform. Until then, we released the functionality, which is not like pure AI but which is helping customers when they are typing the search query that we are adding better suggestions, and we are adding related stuff based on the previous results. This is what we are already piloting on that new technology, but we expect much more when we have it. At the same time, we have a very heavy stream when we are making sure that our website is able to talk with all AI platforms because our observation right now is that not many customers are really using the apps OpenAI and other platforms. It's more still organic language, help me find the Groupon deals in New York, for example, the query which is quite often used in OpenAI or find me the deals for, I don't know, bowling during the weekend. We want to make sure that our website is providing feeds for AI agents so that it’s easy to incorporate our results in that natural language flow there. But obviously, we are and will be ready also for the upward when we see some better numbers coming. We have projects which are covering it so that we are ready. But from an impact perspective, I believe that the bigger value right now is about the compatibility of the website to talk with AI engines so that it's easy for them to show our results.

We have one final written question. Can you give an update on the Italian tax settlement?

Yes, I can take that one. There are more details on this in our queue. But the headline is we continue to see progress there. Our Italian entity received an update that the proposed settlement we had has received several approvals. So that's good progress. Now it's waiting to get a revised assessment that reflects the terms of the agreement. We also have an upcoming court date in December, and we are expecting to jointly seek judicial approval. So this is progress. We're hoping to resolve this ongoing matter and put it behind us. At the same time, it's been a fluid situation. We will continue to update you as we get more information. And maybe as a reminder, the remaining amount owed under the terms of this agreement is approximately $15 million. That's the latest update we have in Italy. Thank you.

Thank you, Rana. Thank you, Dusan. There are no further live or written questions. So this concludes our call for today. Thank you, everyone, for joining. For additional information, please go to investor.groupon.com.