Groupon, Inc. Q3 FY2024 earnings call

International Local: Excluding Italy, revenues decreased by 2% year-over-year, and the quarter ended with stable and improving trends. Success in implementing the marketplace playbook to revitalize the local experiences marketplace in several countries, even though it still operates on the old tech stack.

North America Local: Faced headwinds overall but had a strong summer Things To Do season, with the Things To Do vertical growing faster than the market and other online marketplaces. Reached 100% mobile web and desktop traffic in North America on the new website. Saw growth in new customer cohorts in North America. Experienced a drop in legacy customer retention rates, but initiatives are in place to improve retention.

New Customer Acquisition Engine: The current marketing philosophy is to run marketing channels with a target ROI of one. New customer cohorts spend approximately 1.4 times their initial purchase by month 12. Focus on improving the customer lifetime value and purchase frequency of new customers. Platform changes led to inefficient marketing campaigns in the third quarter, but improvement was seen since the US presidential election.

Product & Engineering: Progress in International on the old tech stack indicates the necessity of North America's tech changes despite short-term performance drop. The new front-end platform is expected to be superior to the Legacy platform by the end of Q4, enabling faster customer experiences, expanded gifting experiences, video content, and enhanced merchant and category pages. The new app in beta is showing solid performance in North America, with focus on fine-tuning for full rollout early in 2025

Global Billings: $373 million, down approximately 10.9% year-over-year.

Revenue: $114 million, down 9.5% year-over-year, at the lower end of the guidance. Revenue as a percentage of Gross Billings was 31%, up 0.5% year-over-year. Gross profit as a percentage of revenue was 90%, consistent with the prior quarter.

Marketing expense: $36 million, which was 35.2% of gross profit, in line with the expected range of 30% to 35%.

Adjusted EBITDA: Positive $15 million, marking the sixth consecutive quarter of positive adjusted EBITDA. The trailing 12 months adjusted EBITDA was positive $78 million.

Cash flow: Third quarter operating cash flow was negative $16 million, and free cash flow was negative $20 million. The quarter ended with $160 million in cash and cash equivalents, excluding $29 million of restricted cash.

Active customers: Approximately 15 million worldwide as of the end of the quarter, a decrease of 0.3 million from the prior quarter. In North America, the active customer count was flat sequentially, and when excluding the goods category, North America active customers grew sequentially for the third quarter in a row and year-over-year for the second quarter in a row.

Local category: Consolidated local billings were $326 million, down 8.1% year-over-year. In North America, local billings were $249 million, down 4.5% year-over-year. International Local Billings were down 18.0% year-over-year due to exiting the local business in Italy.

Travel category: Consolidated Travel Billings was $23 million, down 21.9% year-over-year, with uneven performance expected to continue.

Goods category: Consolidated Goods Billings was $25 million, down 29.6% year-over-year, with the business struggling and becoming a smaller part of the overall business at 5% of third quarter revenues and declining rapidly

Fourth Quarter 2024: Revenues are expected to be between $124 million and $131 million, representing a year-over-year decline between -10% and -5%. Positive adjusted EBITDA is expected to be between $14 million and $19 million, with positive free cash flow.

Full Year 2024: Year-over-year revenue change is projected to be at -6% to -4% (below the prior outlook). Positive adjusted EBITDA is expected to be between $65 million and $70 million (narrowed range due to the lower Q4 outlook). Positive free cash flow is expected for the full year.

2025: Currently, it is expected that 2025 revenues compared to 2024 will be flat or have low-single digit growth (first half down, second half up). EBITDA is expected to be similar to or better than 2024, and free cash flow is expected to be positive. The timing of revenue inflection to sustained positive growth is delayed by the exit of Italy Local and the impact on North America legacy customer retention rates from tech migrations, with no inflection expected in Q4 2024

Legacy Customer Retention: A one-time drop in the retention rates of legacy customer cohorts in North America may pose a headwind to future financial performance. Platform changes may have created friction leading to the potential loss of certain audiences.

Italy Tax Matter: One of the subsidiaries, Groupon Esaral, has been litigating a negative tax assessment in Italy since 2018. The second-level appeal's Court indicated a ruling against Groupon SRL in favor of the tax authorities at the appeal level. The company is defending the case but does not expect financial exposure exceeding the assets of Groupon SRL.

Goods Category: The current Goods business is struggling with a negative trend and is becoming an increasingly smaller part of the business with no near-term change

Q: Could you provide more color on why you don't think the legacy retention rates would bounce back in North America and what the impediment is?

A: Dusan Senkypl mentioned that while there are activities to reactivate legacy cohorts, platform changes like password resets and user logouts added friction. Some customers may not log in again, but efforts are ongoing to reactivate them.

Q: Can you give the timing for the international Tech Stack upgrade?

A: Dusan Senkypl stated the plan is to do it in the first half of the next year.

Q: What happens to the remaining 2026 converts?

A: Jiri Ponrt said they still have the remaining $54 million of 2026 converts and plan to either refinance or earn money to pay them back.

Q: Talk about what's needed to hit the marketing payback of 100% ROI within 14 days.

A: Dusan Senkypl said they are close to hitting the 100% ROI, with no major blockers. Periods of inefficiency due to platform changes and the US presidential election impacted it, but improvement is seen since the election.

Q: Explain why an increase in local voucher redemption rates was a headwind to North American local revenues.

A: Dusan Senkypl explained it's linked to variable consideration, where higher redemptions are part of revenue but also related to breakage aspects.

Q: Talk about the SumUp ownership and valuation.

A: Dusan Senkypl said SumUp is a private component where sale requires coordination with SumUp as there's no public market.

Q: Share progress on the sales force in North America.

A: Dusan Senkypl said hiring was paused in the last six weeks but ramped up during the quarter, with plans to continue from January. Focus on hiring in Chicago, expanding office space, and seeing efficiency in largest population centers of the US and similar trends in Europe