Groupon’s (GRPN) CEO Eric Lefkofsky on Q2 2014 Results – Earnings Call Transcript

August 6, 2014 6:36 am | By More

Source: Seeking Alpha

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Groupon (NASDAQ:GRPN)

Q2 2014 Results Earnings Conference Call

August 5, 2014, 5:00 p.m. ET

Executives

Genny Konz –Investor Relations

Eric Lefkofsky – Chief Executive Officer and Director

Jason Child – Chief Financial Officer

Analysts

Heath Terry – Goldman Sachs

Mark Mahaney – RBC Capital Markets

Paul Bieber – Bank of America

Douglas Anmuth – JPMorgan

Ross Sandler – Deutsche Bank

Brian Fitzgerald – Jefferies

Arvind Bhatia – Sterne Agee

Ken Sena – Evercore

Operator

Good day everyone, and welcome to Groupon’s second quarter 2014 financial results conference call. [Operator instructions.] For opening remarks, I would like to turn the call over to the VP of FP&A and investor relations, Genny Konz. Please go ahead.

Genny Konz

Hello, and welcome to our second quarter 2014 financial results conference call. On the call today are Eric Lefkofsky, CEO; and Jason Child, CFO. Kal Raman will be available for questions during the Q&A portion of the call.

The following discussion and responses to your questions reflect management’s views as of today, August 5, 2014, 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.

Groupon encourages investors to use its Investor Relations website as a way of easily finding information about the company. Groupon promptly makes available on this website, free of charge reports that the company files or furnishes with the SEC, corporate governance information, and select press releases and social media postings.

Our results for the second quarter reflect the acquisitions of TMON and Ideeli since their respective dates of close in January. We will, at times, discuss performance including and excluding the impact of the acquisitions for comparison purposes. Additional detail regarding the contribution of each to the quarter will be included in our 10-Q.

On the call today, we will also discuss the following non-GAAP financial measures: adjusted EBITDA, non-GAAP earnings per share, and free cash flow, as well as 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 non-GAAP measures, including reconciliations of these measures with U.S. GAAP.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2013.

Now, I will turn the call over to Eric.

Eric Lefkofsky – Chief Executive Officer and Director

Thanks, Genny. We made good progress in the second quarter. Our local marketplace of over 240,000 deals continued to gain broader awareness. We reached another all-time high in mobile transactions, as nearly 92 million people have now downloaded our app, and our international business continued to stabilize and is now contributing nicely to our bottom line.

Q2 was another record quarter for Groupon. Gross billings increased 29% to $1.82 billion, and revenue increased 23% to $752 million. Adjusted EBITDA came in toward the high end of our range at $59 million, up from $40 million last quarter, and non-GAAP EPS was in line with our expectations at $0.01.

Demand remains healthy in North America. Billings grew 12% to $799 million, led by a 26% year over year growth in our goods business and 44% growth in travel. North American revenues also increased 12% to $424 million. Gross profit was about flat sequentially at $180 million, and segment operating income was $15 million, up from $11 million in Q1.

EMEA billings were about flat with the prior year, at $483 million, also reflecting strength in goods, which grew 14% year over year. Revenue growth was 42%, as the mix of direct revenue was higher in the quarter. In addition, we generated $28 million in segment operating income, up from $19 million in Q1, as a result of marketing reductions.

After much work, EMEA has now seen two quarters in a row of year over year customer growth after a few quarters of decline, and remains profitable and on stable footing. Rest of world grew 145% in billings largely driven by the acquisition of TMON.

Excluding our Korean business, rest of world grew 17% on an FX-neutral basis. Revenues grew 40%. The large difference between billings growth and revenue is related to TMON’s deal margins, which have historically been in the low teens, as are typical for large Korean ecommerce companies.

The rest of the world segment operating loss was $18 million for the quarter, reflecting continued investments, largely in TMON. While these investments are larger than we originally anticipated, they have driven significant growth that has, and continues to exceed, our expectations. Excluding TMON, our losses improved by about $5 million year over year, which is on track with our plan to generate positive segment operating income by Q4.

In light of the good progress we’ve made in rest of world, Kal Raman is transitioning from COO of CEO of APAC, so that he can focus all of his energy on continuing to unlock value in our high-growth Asian markets. I want to thank Kal for all the great work he has done building our infrastructure as COO. He has built a strong team that positions us for success going forward. Kal will continue to report to me in his new role.

Recall that for 2014, we have three primary objectives. The first is to reaccelerate our local growth in North America and abroad. Second is to improve the gross margins and operating efficiency of our goods business. And third is to continue to achieve stability in our international operations and reduce our losses in rest of world so that every region in which we operate is generating positive segment operating income by year-end, excluding any impact from acquisitions. We continue to believe we’re on course to achieve all three objectives by the end of 2014.

Let me start with the first. Our North American local billings growth reaccelerated in Q2, albeit only slightly, after two quarters in a row of deceleration, from an increase of 1.4% last quarter to 1.8% this quarter. We believe one of the main drivers of this is that redemptions have appeared to stabilize.

The average number of unused Groupons per customer, which is a good indicator of people’s willingness to buy more, has declined by more than 25% in the past year. That number has now been stable for the majority of 2014, which leads us to believe that we’ve seen the bottom.

As redemptions stabilize and other improvements we’ve put in place take hold, we expect local growth to continue to accelerate. The acceleration of our local business continued to grow robustly in July, which we believe is another sign that we’re on track to deliver double digit year over year billings growth in North America local by year-end.

That said, our take rates in North America local decreased by roughly 300 basis points compared to last quarter, predominantly driven by an increased proportion of sales for high-quality, lower take rate merchants in the quarter. In addition, we’ve increased site-wide sales and order discounts over the past few quarters in an effort to drive adoption of our marketplace.

Until now, we’ve absorbed the impact of these discounts ourselves. Going forward, we intend to pass on a portion of these promotional discounts to our merchants. As these efforts unfold, we believe that take rates in local will improve and remain within the range we’ve seen over the last couple of years going forward.

Our second priority is to improve our goods margins, particularly in North America. Our costs have historically been almost 2x that of other comparable ecommerce companies. To address this, we’ve made some significant changes, including shifting more of our business to drop ship, moving more fulfillment to our own distribution center in Kentucky, and increasing units per order.

We’re pleased with the progress we’ve made to date, with gross margins in North America increasing over 400 basis points quarter over quarter, from 5% in Q1 to 9% in Q2, and we believe we’re well on track to achieve our goal of double digit gross margins in North America by year-end.

Our third priority is to continue to improve our international operations and reduce our losses in rest of world. We made significant progress in the quarter, reducing our total segment operating loss from $25 million in Q1 to $18 million this quarter.

As we continue our regionalization efforts, and as APAC growth gains momentum, we expect continued improvement in Q3. Given our progress to date, we expect to generate positive segment operating income by Q4, excluding TMON.

As we shared last quarter, we define long term success as both gross billings and gross profit growing at least 20% annually over the next five years. We’re focused on the operating objectives I’ve highlighted, because we believe they are the purest drivers of gross profit dollar growth over the long term.

We also advanced our strategic objectives in the quarter. First, mobile. Mobile remains over half our business worldwide. Mobile mix as measured by transactions continued to increase in Q2, reaching yet another all-time high. As we said last quarter, we are no longer becoming a predominantly mobile business, we now are a predominantly mobile business.

Nearly 92 million people have now downloaded our app, and by most reports, we are now the most mobile large-scale ecommerce company in the world. Yet activations remain behind web, so while people are engaging with Groupon through their mobile devices, we have yet to optimize the customer experience. Each quarter, we make progress, and we’re inching our way closer to parity over time.

Second, local. Local and mobile are converging. Local is all about geography, and mobile is all about proximity. Both are intertwined, which is why our mobile business has grown so fast. That said, we have yet to truly deliver on the vision of Groupon, the vision of a world where all merchants and consumers are connected in real time, through a network that allows every merchant to attract the very best customers and allows every customer to find the very best deals.

What we’ve learned over the past year is that in order to win, we need Groupon to become an integral part of our customers’ lives, a daily habit. To achieve that, we need to make the experience of buying and redeeming a Groupon as easy as pulling out your credit card or buying an app on your phone.

When people use their Groupons, they buy more. When they don’t, they buy less. To close the loop and get more people using their Groupons, we need to connect merchants to our customers in real time, making the Groupon experience seamless, frictionless, and fun.

After years of work and significant investment, the tools we’ve built to close this loop are starting to hit the market with the rollout of our local commerce platform, which I’ll discuss in a minute.

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