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Groupon (GRPN)

Q3 2012 Earnings Call

November 08, 2012 5:00 pm ET


Genny Konz

Andrew D. Mason - Co-Founder, Chief Executive Officer and Director

Jason E. Child - Chief Financial Officer


Ralph Schackart - William Blair & Company L.L.C., Research Division

Ross Sandler - Deutsche Bank AG, Research Division

Rohit Kulkarni

Brian J. Pitz - Jefferies & Company, Inc., Research Division

Zachary Arrick - Morgan Stanley, Research Division

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Thomas C. White - Macquarie Research

Craig A. Huber

Kaizad Gotla - JP Morgan Chase & Co, Research Division



Good day, everyone, and welcome to Groupon's Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] Today's conference call is being recorded.

For opening remarks, I would like to turn the call over to the Senior Director of Investor Relations, Genny Konz. Please go ahead.

Genny Konz

Hello, and welcome to our third quarter 2012 financial results conference call. Joining us today are Andrew Mason, our CEO; and Jason Child, our CFO.

The following discussion and responses to your questions reflect management's views as of today, November 8, 2012, only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC, including our Form 10-Q.

During this call, we will discuss certain non-GAAP financial measures. In our press release and our filings with the SEC, each of which is posted on our IR website, you'll find additional disclosures regarding non-GAAP measures, including reconciliations of these measures with GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2011.

Now I'll turn the call over to Andrew.

Andrew D. Mason

Thanks, Genny. In Q3, we missed our revenue expectations while meeting our operating profitability expectations. We're also sharing guidance that shows we anticipate strong fourth quarter growth. Jason will take you through the numbers in detail. But before that, I'll frame them by touching on some of the major themes.

As discussed in our last call, to understand the numbers, you have to dig below the surface and look at Groupon's 2 regional businesses. First is our North American business, which is now over 4 years old in our oldest market, shows the power and potential of our model. This is the market where we've continually invested in innovations like mobile and deal personalization and obsessed over customer and merchant experience. We've become one of the world's largest mobile commerce companies with about 1/3 of transactions occurring on mobile devices. Our customer and merchant satisfaction scores are world-class, and we've diversified our e-mail daily deal business into a second major category, Groupon Goods. As a result, we saw a healthy year-over-year gross billings growth of 38% this quarter and expected to accelerate in Q4, and this happened while reducing our marketing spend by 63% in Q3 year-over-year.

Second is our International, predominantly European, business. We followed a different playbook in Europe, focusing on rapidly capturing market share at the cost of investing in technology and innovation and, too often, the satisfaction of our merchants and customers. With a weak European economy, we didn't have the necessary runway to integrate our international business before reaching a plateau in growth earlier this year. The result is a Q3 annual gross billings decline of 12%. To put the impact of our international business in perspective, if we merely held the last 2 quarters of international performance flat, we would've seen another $135 million in gross billings in Q3.

As we said last quarter, to fix our international business, we are following the playbook that we wrote for North America, specifically rolling out technology like deal personalization, shifting our deal mix and focusing on merchant satisfaction. Kal Raman, who has significant experience managing sales operations of this scale, is now squarely focused on addressing our international issues, and we're making progress on all fronts.

First, on technology. SmartDeals e-mail personalization, which has driven a 25% lift in our North American e-mail purchase rate, is being fine-tuned in the U.K. and Brazil and will continue to roll out through Q1. Second, we've improved our merchant satisfaction scores in most international countries, and we've started to see improvements in the quality mix of our merchants. Not surprisingly, our European growth since early September has been strong. We've had 2 consecutive months of growth for the first time in a year. We've begun to see record days again in countries like the U.K., which began the turnaround effort early on and have seen dramatic 20% improvement over the last several months in customer satisfaction coming close to North America's numbers. This shows us that we're on the right track, and our North American playbook, technology and merchant focus applies to our international business

So as you can see, in our Q4 guidance, we're cautiously optimistic and confident that we're on the path to continued improvement in Europe. Stepping back, I want to talk about the evolution of our e-mail business. In addition to local, it now includes a second major category, Goods. Goods has been the primary driver of our growth over the last 2 quarters and is now at an annual billings run rate of nearly $1.5 billion, a remarkable feat for a category that barely existed for us a year ago.

Now this begs the question, what does this mean for our local business? Has it reached the limit? To be clear, we continue to believe in the size of the local e-commerce opportunity in front of us. That said, we don't look at e-mail as the only or largest growth channel for local. Our e-mail business is about surprising and delighting customers with curated, unbeatably priced offers from an ever-expanding list of categories. To grow our e-mail business, it's about fresh content and never becoming boring. That's why Goods has been so successful. It fits perfectly into that customer value proposition and drastically increases the variety of our daily e-mails, sustaining engagement and driving growth. Of course, there are limits to the number of deals that we can put in an e-mail. So as we dedicate real estate to Goods, it leaves less for local. That means we're consciously trading off growth in the local business for what we believe to be the most engaging consumer experience, which means high-quality deals in as many categories as possible.

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