Earnings Call Transcript - GRPN Q4 2020

Operator, Operator

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

Jennifer Beugelmans, Chief Communications Officer

Good morning, and welcome to Groupon's fourth quarter 2020 financial results conference call. On the call today are our Interim CEO, Aaron Cooper; and CFO, Melissa Thomas. The following discussion and responses to your questions reflect management's views as of today, February 26, 2021, 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, 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 Aaron.

Aaron Cooper, Interim CEO

Thanks, Jennifer. And thanks to you all for taking the time to join us today. I'm excited to update you on how we finished 2020 and our plans for 2021. As I reflect on this past year, like so many others I'm sure, I go immediately to the challenges we all faced. But it's also very important for me to acknowledge the resilience that our merchants, customers, and employees showed during these unprecedented times. When I think about Groupon and how far we've come over the past year, I'm so proud of the hard work our team has poured into creating a path to growth. We've gone from local units being down nearly 80% and generating negative adjusted EBITDA to delivering $50 million of adjusted EBITDA for the full year 2020, taking significant fixed costs out and strengthening our balance sheet. On top of improving our financial results, we also transitioned our North American goods category to a third-party marketplace and developed and began executing on a strategy that fundamentally addresses our merchant and customer value propositions. We're building muscle in 2020. We're moving faster, empowering our teams, and focusing on the most important opportunities. In short, we believe we're on a path to growth. As we move into 2021, we're excited about our path, which we believe will include a second-half organic recovery tailwind. This tailwind, coupled with a meaningfully lower fixed cost base, should allow us to drive sequentially improving gross profit and adjusted EBITDA as we progress throughout 2021. We believe this anticipated recovery scenario provides a framework for how to think about the base case for Groupon, which would suggest meaningful progress from where we are today. At just 80% of our 2019 gross profit level, we believe we can deliver $250 million in adjusted EBITDA in 2022. Of course, however, our intention is to grow. And this year, you will see us continue to execute on our two strategic priorities: expanding inventory and modernizing the marketplace. In 2021, our goal is to bring these two priorities together to position Groupon for long-term growth. By creating and leveraging a significantly improved experience for our customers, we believe we will be able to drive sell-through of our expanding inventory, which we intend to grow both by making more of our existing supply repeatable and expanding our marketplace to new merchants. We will then amplify these efforts with an improved merchant experience that will support the continued growth of our marketplace. Let me first provide you with an update on our inventory strategy...

Melissa Thomas, CFO

Thanks, Aaron, and thanks again to everyone for joining us today. As I reflect on 2020, while it's certainly been a challenging year, I'm so impressed with the resilience our business has shown and how we continue to deliver sequentially improving results in 2020. I'm also so energized by how the Groupon team has stepped up and accomplished so much to position Groupon for recovery and growth. Today, I'll use my time to provide you with a few updates on our financial and operating progress, including a review of the fourth quarter results, business drivers and trends, the status of our restructuring plan, and lastly insights on our expectations for the first quarter and full year 2021. Starting with our consolidated fourth quarter results, we delivered $633 million of gross billing, $343 million of revenue, $179 million of gross profits, and $40 million of adjusted EBITDA. In the midst of rising COVID cases around the world, we delivered another quarter of sequential improvement in gross profit and maintained discipline around our costs, proving the resilience of our business. We ended the year with a solid balance sheet and liquidity. In the fourth quarter, we generated nearly $70 million of free cash flow and ended the quarter with approximately $850 million in cash, including $200 million of outstanding revolver borrowings. Next, I'll provide more insights into our fourth quarter results, business drivers and trends. We ended the quarter with 30 million active customers. I want to remind everyone that since active customers is a trailing 12-month metric, we expect this number to decline as it reflects the ongoing impact of COVID-19. During the fourth quarter, we sold a total of 25 million units; the most since the onset of the pandemic. Global local units were $12 million, and while international local units were heavily impacted by increasing COVID restrictions, North America local units were 7% higher in the fourth quarter compared with the third quarter. Consolidated goods units were $13 million, which was a 45% increase compared with the third quarter. We were pleased to deliver higher North America local gross profit compared with the third quarter, as well as improved results in our North America and international goods categories. Sequential gross profit improvement in North America and local was in part driven by improved unit volume in booking, including within our beauty and wellness vertical. In fact, during October, North America Beauty & Wellness bookings were more than 75% recovered, measured as a percentage of 2019. In addition, certain categories within Beauty & Wellness such as high-end cosmetic services went nearly 90% recovered. On a year-over-year basis, North America local unit performance improved in the fourth quarter compared with the third quarter; that said, in December we saw a pullback in year-over-year unit performance due to worsening pandemic conditions and fewer holiday gatherings. In international local, the increased COVID restrictions had a more significant impact on fourth quarter performance. As I noted on our third quarter earnings call in late October and into November, we started to see local down in some countries as much as 80% year-over-year, as restrictions were reinstated across Europe. The restrictions continued and in some cases tightened throughout the remainder of the fourth quarter, and we learned more into good and relevant local supply to keep consumers engaged. Globally, our goods category delivered 42% higher gross profit in the fourth quarter compared with the third quarter, and we completed the North America goods transition to a third-party marketplace model. Hitting this milestone allows us to run the goods category at a much slower fixed cost base and significantly simplify our operations. Starting with the first quarter of this year, you should expect the vast majority of North America goods revenue to be recognized on a net basis. Regarding the international transition, we will begin the transition to third-party in the second quarter and expect to be complete by the end of the third quarter.

Trevor Young, Analyst

Hi. Thanks for the question. The color on the first quarter and second quarter local billings was pretty helpful. It seems like the trends seem to be generally consistent with the fourth quarter results. Was there any change in cadence in January and February in North America or abroad? Was January improved in the U.S. before we had heavy winter weather in some states? And then can you remind us how the first quarter 2020 compared to this year? Thanks.

Melissa Thomas, CFO

Thanks, Trevor. Sure. I'll provide some additional color on our first-quarter performance quarter-to-date. Thus far in 2021, we are seeing year-over-year billings performance for North America local; it's a few points better than fourth quarter levels. And North America local billings are tracking at around 51% of 2019. So as you would expect, we are performing better in markets with fewer restrictions and where the weather is warmer. We are seeing our Beauty & Wellness and Things To Do volumes are increasing sequentially from January to February, which is encouraging. And then with respect to international local performance there, it continues to be impacted by government mandated restrictions that are in place across Europe with some of the tightest restrictions in place in our largest international markets like the UK and Germany. From a quarter-to-date perspective international local billings are down about 63% year-over-year and tracking at around 37% of 2019 levels. So while we continue to see near-term volatility we remain confident in our ability to capitalize on the recovery, which we expect to be weighted to the second half of the year. In terms of Q1 2020 and when we started to see the impacts of COVID hit in March of 2020 is really where we started to see the impact. So what you'll want to do from a modeling perspective is looking as a percentage of 2019 year-over-year comps won't be as meaningful.

Aaron Cooper, Interim CEO

Hi. Thanks for the question. As we look to recovery, we're looking at both the customer and merchant side, and we're really confident based on what we're seeing. So let me give you a couple of examples that I think will help you understand. As Melissa mentioned, some of our categories such as home and auto and beauty and wellness have been relatively reliable throughout the pandemic, once merchants settled in. Now, the ones you mentioned, such as live events and leisure, are on the later side of recovery. The way that we're working with those merchants is really special and I think important. When we're talking to some of these merchants, we're hearing some of the complexities they're facing in opening back up. For example, a merchant that runs experiences all over the nation has found that Groupon is one of the most resilient channels they have, performing way above average for their business. The reason is that we have our core inspiration model that we can use to inspire demand and communicate to customers that these merchants are open. We can inform customers that they have adopted new services, letting them know before customers start searching for those experiences, before the demand has passed. So we're being really helpful to merchants in that type of case. Another merchant in the leisure space mentioned that they may not see much demand from overseas or traveling from across the country, so they need to create local demand. That's another way that merchants are getting creative and using Groupon to market and run their businesses into recovery. Overall, we feel really good about recovery; it's a matter of when, and we're working with our merchants category by category to bring them back online. I completely agree with your assessment of pent-up demand across all our categories. Thanks for the question.

Eric Sheridan, Analyst

Thank you so much for taking the questions. I have a two-part question if I can. Going back to the inventory test and what you learned in the four markets, what surprised you to the upside in terms of the test that produced the rate of change versus what's your initial goals have been going in? Furthermore, can you give us a better sense of the investments that need to be made to widen the inventory expansion initiative as we move through 2021? What should investors think about in terms of the yields or returns on the revenue side from these investments? Thanks so much.

Aaron Cooper, Interim CEO

Thanks, Eric. I'm happy to address both parts of your question, and I appreciate you asking about our strategy. This is where our focus has been. When looking at our business overall, we see two important horizons. One is recovery; at our low cost base, we are just recovering to 80% of our EBITDA in 2019, and at 90%, we can achieve record EBITDA. What you're asking about is the second part of that inflection, which is our business growth plan. As we rolled out our test, we were excited by the reaction from customers and merchants. We are opening up our marketplace; we’re moving from an inspiration marketplace to incorporate a destination component. Our tests yielded a 65% to 70% improvement in inventory, and we saw engagement from customers in both billings and units despite having very little change in our customer experience. We were surprised to the upside because many times when rolling out new products, we're looking for quarter-point improvements, but in the middle of COVID, we witnessed significant reactions from both sides. The investments we are making include scaling the removal of restrictions, rolling out offers, changing our customer experience, and supporting our merchants with self-service tools. We feel really good about our cost structure and the investments we’re making. It's a matter of focus and prioritization, and I couldn't be prouder of the energy our team has shown in the last year.

Michael Ng, Analyst

Hi, good morning. Thank you very much for the time and the question. I'm just wondering if you could talk a little more about the removal of deal restrictions. Specifically, I'm interested in how the value proposition for both the merchant and consumer might change as a result. How do merchants feel about this removal? Does it change their view of Groupon as a channel for user acquisition and eventually lead to buying more market-rate goods?

Aaron Cooper, Interim CEO

Thank you. In our suite of inventory products, we have deals, offers, and market-rate options. The removal of deal restrictions is one lever that merchants have, and we've found that they are willing to remove these restrictions. They are excited to win customers back multiple times, which gives them confidence that these customers will become loyal. Merchants have the option to add an offer that can convert to a deal over time, which helps to lower overall costs for repeat purchasers. We've given merchants the tools to support always-on interaction with Groupon where they can take advantage of our unique inspiration model and also engage with high-intent customers through offers.

Douglas Anmuth, Analyst

Great, thanks. Can you talk about rolling out a new customer experience in the second quarter to all North America users? What are you seeing in terms of the early testing there? Additionally, can you provide a sense of how many merchants you're seeing that kind of activity from and within the test markets?

Aaron Cooper, Interim CEO

Thanks. We're opening up the marketplace on both sides. In our tests, we achieved significant improvements without making changes to our customer experience; in fact, our homepage hasn't substantially updated in five years. The CX changes are aimed at making the customer journey more intuitive, engaging, and supportive of repeat purchasing. We believe making our marketplace a destination will enhance this journey as we progress. Regarding the merchant side, we've seen strong engagement especially in our beauty and wellness category. Offers have shown significant uptake, allowing merchants to invite customers to repeat their purchases more effectively. We expect 80% of inventory to have restrictions removed, with broader rollout planned as we see positive results.

Operator, Operator

There are no further questions today. So this concludes today's conference call. Thank you for participating. You may now disconnect.