Groupon Q1 2023 Earnings Call Transcript

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May 10, 2023

Key Takeaways

  • Q1 results showed gross billings down 14% and revenue down 21% year-over-year, with a negative $5 million adjusted EBITDA and $86 million free cash outflow.
  • Interim CEO Dushyant Sinkable unveiled an 8-pillar transformation strategy covering supply improvement, product modernization, performance marketing, team building, organizational redesign, cost efficiency, category synergy and financial flexibility.
  • Groupon’s cost-savings plan aims to cut $250 million in annual expenses and attain a non-GAAP SG&A run rate of $290 million by year-end.
  • Management expects to generate positive adjusted EBITDA for the remainder of 2023 and anticipates year-over-year local billings growth by early 2024 despite near-term revenue declines.
  • The company is exploring monetization of non-core assets—such as its 2.29% stake in a global payment provider valued at ~$120 million—to bolster liquidity.
AI Generated. May Contain Errors.
Earnings Conference Call
Groupon Q1 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

And welcome to Groupon's First Quarter 2023 Financial Results Conference Call. On the call today are Interim CEO, Dushyant Sinkable and CFO, Jari Palmerd. At this time, all participants are in a listen only mode. A question and answer session will follow the company's formal remarks. As a reminder, today's conference is being recorded.

Operator

Before we begin, Groupon would like to remind listeners that the following discussion and responses to your questions reflect management's views as of today, May 10, 2023 only, and will include forward looking statements as results may differ materially from those expressed or implied in the company's forward looking statements. Additional information about risks and other factors that could potentially impart or impact The company's financial results are included in their earnings press release and their filings with their SEC. 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 or furnishes with the SEC, corporate governance information and select press releases and social media postings.

Operator

On the call today, the company will also discuss the following non GAAP financial measures: Adjusted EBITDA, non GAAP SG and A, free cash flow and FX neutral results. In Groupon's press release and their filings with the SEC, each of which is posted in their Investor Relations website, you will find additional discloses regarding these non GAAP measures, including reconciliations of these measures to the most comparable measures under U. S. GAAP. Unless otherwise noted, all comparisons are provided on an FX neutral basis.

Operator

And with that, I'm happy to turn the call over to Dushyant.

Speaker 1

Hello, and thanks for joining us for our Q1 2023 earnings call. It's a pleasure to be with all of you. In addition to today's prepared remarks, I encourage you to review our shareholder letter, Press release and 10 Q, which contain more detail on our Q1 results. On our call today, I will cover 4 key topics. First, what I've learned during my first days at Groupon.

Speaker 1

2nd, the challenges that we face as a company and our new transformation strategy That our team is executing on to address our challenges and make the most of our opportunities. 3rd, The highlights of our Q1 performance and lastly, our outlook for 2023. Before I get started, I would like to briefly introduce myself. I'm an entrepreneur by trade and I have created Several global e commerce and technology products used by more than 250,000,000 users. I built Ipo Hishteni CZ, a Net Brokers Holding, A dominant fintech player with more than 400 employees, which was bought by a German media group Bauer Media in 2018.

Speaker 1

All my projects were bootstrapped, which means that it's my nature to build highly effective, agile and performance oriented companies. In 2015, I co founded Belfair Capital, an entrepreneurial investment firm that has grown rapidly to approximately $1,000,000,000 in net asset value And is currently Groupon's largest shareholder with ownership of approximately 22%. Its private equity portfolio includes almost 30 companies, including several marketplace companies. At Palefire, I served as the Chairman and CEO and was responsible for leadership, strategy development, organizational design, Go to market and product development. Sailfire also has a track record of successful transformations, Including its investment in Alkro, which is Central and Eastern Europe version of ebay.com, which increased the GMV by 2.4 times in 3 years, while maintaining healthy profitability.

Speaker 1

I'm really proud of the approach we developed at the PayFacire to drive business transformations, And I'm excited to bring my experience to help lead DuPont. Now, the reason I'm telling you this is that my experiences make me what I am today. You will find me a leader who keeps things simple, keeps customers at the center of everything, short term impatient and long term patient, is not afraid of challenges and determined to beat them. I understand your disappointment with Groupon, and I want nothing but to be honest, Transparent and to deliver results. During my first 40 days as a CEO, I've listened to and learned a lot from our employees and our partners.

Speaker 1

I immersed myself into our products and technology, into our value proposition and into how we meet the market's needs. Through all of these conversations, I've been struck by the opportunities we have internally to operate in a much more efficient and productive way. We can generate much higher output with the same or even less resources. My initial focus is to execute on these opportunities So that we have a solid base for future growth. I also acknowledge that we are facing challenges that we need to address And that you are all looking for responses from us.

Speaker 1

We recognize that turning our business around is going to be tough And that it won't happen overnight. This requires a focused transformation and requires that we leverage all of our assets. We have developed our transformational strategy by drawing inspiration from A, the principles of building a successful Internet marketplace b) automate Groupon a past success and c) a Groupon clone in the Czech Republic, which fully completed its transformation from a daily deal discount flash site to a destination experience marketplace. Our transformation plan is built on 8 strategic pillars that will provide focus, organize our teams and drive momentum. These are: 1st, Fix the supply side of our marketplace.

Speaker 1

2nd, raise our product experience to modern marketplace standards. 3rd, tune our marketing engine towards lower funnel performance channels. 4th, assemble a high performance team 2, excellence 5th, rebuild our organization structure, business processes and management systems 6, create an efficient cost structure. 7, leverage our business lines to support local. And I improve our financial flexibility.

Speaker 1

Each of these pillars are detailed in our shareholders' letter, But I will say a few words on each year 1 by 1. Firstly, fix the supply side of our marketplace. Everything starts with supply. If we vendorize supply, demand will follow. Our plan to fix the supply side of our Panhard.

Speaker 1

This place involves a reinvigorating our merchant value proposition, returning to geofocus and recommitting to a sales driven marketplace. Groupon needs to improve its value proposition for merchant partners as its current approach of heavy discounts and Defensive deal margin structure has led to increased churn of its supply base. To strike a better balance between consumers, merchants and Groupon, The company aims to offer more flexible and dynamic partnership solutions that meet merchants' individual needs and marketing goals. This process will take at least 12 months to transition and achieve the right balance. Groupon has refocused on a geo targeted approach Too much local demand with local supply.

Speaker 1

Performance vary significantly across very top 30 markets with some growing And others shrinking double digits year over year. By prioritizing merchant acquisition in our top 5 North American markets, We see early encouraging signs and believe we can execute more consistently and drive better performance as we return focus to running our market At the local level. Finally, we consider our sales force critical for securing unique supply on our platform, But in 2022, sales force compensation exceeded gross profit on most of our new supply in North America, With only 20% of new local deals selling more than 10 units, to improve our ROI, We are unifying our sales leadership, implementing a new compensation plan and centralizing our global sales operations. Our second strategic pillar is raising our product experience to modern marketplace standards. Improving the technology infrastructure is a key part of Groupon's transformation strategy to enhance customer and merchant partner experience.

Speaker 1

The current product offering falls short of modern marketplace standards, resulting in an unattractive ROI despite high resource allocation. Groupon has taken steps to right size the tech organization and increased focus on product development, including an ambitious hackathon initiative quickly launch product improvements such as gamification, personalization and generative AI assisted deal creation. Our 3rd strategic pillar is tune our marketing engine to focus on lower funnel performance channels. In Q1, Groupon improved the efficiency of our marketing spend by focusing on lower funnel performance channels And shifting away from incrementality to ROI targets. This resulted in a decrease in marketing spend as a percentage of gross profits, On gains in efficiency, especially in search engine marketing, Groupon is now focused on improving returns in performance channels Before returning to mid and upper funnel channels.

Speaker 1

Our 4th strategic pillar assemble a high performance team with a focus on operational Attracting top talent is crucial to Groupon's success, and the company is seeking individuals who are detail oriented, proactive and customer focused. Groupon has recently hired talent through Belfair Capital's network in the Czech Republic and is also We are recruiting both inside and outside the company. The goal is to create a winning team passionate about Groupon's mission and committed to driving change. Our 5th strategic pillar, rebuilt our organization structure, business processes and management systems. Groupon is prioritizing operational excellence and is making changes to ensure a strong management team and operating systems are in place.

Speaker 1

Your organization is becoming flatter and leaner to enable faster execution of high priority projects, Breaking down silos and implementing a performance culture with metrics and KPIs. We have also improved our management Panhard. Our 6th strategic pillar: create an efficient cost structure. Groupon sees opportunities to improve efficiencies through automation, simplification and implementation of AI tools to reduce costs. The company is reviewing large and small categories of spend and is on track to exit the year with a non GAAP SG and A run rate of 290,000,000 We believe we can improve our bottom line by implementing proper organization structure and the mindset of frugality.

Speaker 1

Our 7 strategic pillar leverage our other categories to support local. We plan to shift our merchandising strategy in goods and travel categories to complement our experiential value proposition and mission to be the ultimate destination For local experiences and services. In Goods, we will offer seasonal trends and inspirational gifts, While Travel will pursue experiential travel by creating packages that include attractions and accommodations. Our goal is to create a portfolio of experience offerings, advanced acquisition, retention, engagement and margin to unlock the synergy potential of our horizontal marketplace business model. Our 8th strategic pillar, Improving our financial flexibility.

Speaker 1

Groupon has taken steps to improve its financial foundation through a January restructuring announcement and March amendment to its credit facility among other plans. The company believes it will have sufficient liquidity to meet its obligation in the next year And he's exploring strategies to further enhance its liquidity position, such as cost savings, additional financing and potential monetization of non core assets. Let's now look back at Q1. We had a disappointing quarter for both revenue and adjusted EBITDA. While Jari will provide more details later, Our Q1 2023 billings and revenue were down 14% 21% year over year.

Speaker 1

We generated negative $5,000,000 in adjusted EBITDA and free cash outflow of 86,000,000 We saw results indicate the business is facing serious challenges that we must address as a company And underscore the need to implement a significant and urgent transformation. Lastly, Our outlook for 2023 and beyond. 2023 will be an important year. We have a lot of work to do and the results will take time. I will make sure that in 2023, We transformed the company and laid the foundation for our long term success.

Speaker 1

As I spoke about earlier, The key objective for the long term health of the business is to fix the supply side of our marketplace. Finding the right balance Our merchant partners will make our business more healthy and sustainable over time. Within this long term context, We took a realistic view on the 2023 business. As a result, I expect our 2nd quarter revenues 4th quarter to decline year over year, I would expect to see a slight improvement in the rate of declines in each quarter. As our transformational strategy takes hold, we expect to see an increase in year over year local billings by early 2024.

Speaker 1

Well, our revenue growth trends may diverge from our lookabilling trends depending on the trajectory of our other categories and the timing of our transformation strategy. When I next communicate in about 90 days, I intend to provide more details to help you monitor our progress towards our priorities. I'm a firm believer in transparent communication and dialogue with all stakeholders. I strongly believe in delivering on our commitment and doing what we Panhard. I will therefore strive to be as open as possible in discussions with all of you to provide regular updates on our progress towards our strategic, Operational and Finance goals.

Speaker 1

With that, I will turn it over to Yousry to provide some insights on our financial performance. But before I do that, let me provide a few words of introduction. Jiri Ponnert is a highly regarded leader, Evidenced by his successful career as CFO of AUSA CZ, one of the biggest e commerce players in Central and Eastern Europe. He brings to Groupon the experience and tenacity we need to help us fulfill our potential. I've worked Closely with him during our time together at Belfair and I look forward to partnering with him as he takes on the role of CFO.

Speaker 2

Thank you, Dushyant, and thank you as well to everyone who is joining us today. It's a pleasure to be here speaking with you. I will use my time today to provide further insight into our Q1 operating and financial results, Progress on our cost saving actions and factors to consider for the remainder of the year. Before I begin, I would like to briefly introduce myself and share a few initial observations I have on our business. I joined Groupon last month ago.

Speaker 2

Before that, I acted as a Group CFO of Perf Architectural. During Q1 2023, I helped the Board with the which is oversight of our finance function. So I had some opportunity to orient myself with the Groupon Finance Department. A big part of the Groupon CFO scope is familiar to me as I acted for more than 7 years This is CFO of Oslo CZ, one of the major Central European e commerce players with a turnover of about US2 $1,000,000,000 During my time with Groupon, I've learned that there are legacy system and processes from the company's quick and acquisitive growth At its onset that I believe can be part of this play in mind. So my priorities apart from more focus on management and decision making will be Focus on liquidity and cash flow management, simplification of the structure and processes as well as our alignment across departments and Automatization of purchases.

Speaker 2

So let's jump into the consolidated first quarter results. We delivered $396,000,000 of gross billings, dollars 122,000,000 of revenues, dollars 105,000,000 Gross profit and negative $5,000,000 of adjusted EBITDA. 1st quarter free cash Outflow was $86,000,000 and we ended the quarter with $164,000,000 in cash, Including 48,000,000 drawn on the Revolver and we had over 18,000,000 active customers worldwide. Turning to our local category. Consolidated local blinks by $360,000,000 down 8% compared with the prior year.

Speaker 2

Since North America, we delivered local billings of 222,000,000, down 11% And had 9,000,000 active local customers as of March 31, 2026, down 2% sequentially and 19% year over year. This is international. We deliver local billings of 94,000,000 flat compared with the prior year and had 5,000,000 active local customers, Flat sequentially and up 2% year over year. Moving to our boots and cargo category. In the Q1 consolidated goods billings were $46,000,000 down 35% And consolidated table billings were $35,000,000 down 11%.

Speaker 2

Turning to our operating expenses. 1st quarter GAAP SG and A was $102,000,000 and down 20% compared with the prior year As we begin to see the benefits of our recent cost saving actions reflected in our financials. Our non GAAP SG and A, which excludes stock based compensation and depreciation and amortization was $92,000,000 down 17% year over year. As a reminder, we completed our migration to the cloud in the Q1 2023 and remain committed to significantly reducing our cloud cost over time, Which will be complemented by lower payroll expenses resulting from the cost saving actions we announced in January. During the Q1 2023, we incurred $9,000,000 in one time pretax charges related to our restructuring plan.

Speaker 2

Marketing expense for the Q1 was $25,000,000 or 24% on gross profit. As we continue to deliver improvements to our fundamental marketplace experience, We believe we kept it more out of our marketing dollars. Our goal is to sustain our marketing expense to below 25% Growth perfect in 2023. Turning to our cash position. We ended the quarter with DKK 164,000,000 in cash, Including DKK48,000,000 on the revolver.

Speaker 2

In the Q1, we had net operating cash outflows of DKK76,000,000 Including $10,000,000 one time payment for oral termination of our Chicago offices. As a reminder, We typically experienced net working outflows in the Q1 of the year due to seasonality and our normal merchant payment cycles. We also repaid $27,000,000 of borrowings under our revolving credit facility during the quarter. In the second half of twenty twenty two, we completed a majority of cost actions related to Phase 1 of our restructuring plan, She is expected to remove $150,000,000 of cost from the business. And earlier this year, we begin executing of 2nd phase of our plan and are on track to substantially complete these actions by the end of Q2.

Speaker 2

In total, we expect these cost actions to reduce our expense structure by 250,000,000. These cost actions as well as our March amendment to our credit facility, examples of Stenel Groupon has taken towards improving its financial foundation to support our transformation this year. With these actions and additional management plans, we believe we will have sufficient liquidity to meet our obligations As they become due over the next 12 months. Grupo continues to hold a 2.29% Equity stake in the private landholder global payment provider, Samah. As a reminder, we reflect the value of the stakes as well as other minority investments on our balance sheet.

Speaker 2

The current value for this investment is approximately 120,000,000 While there is no public market for some of the securities at this time, if any opportunity arises To monetize this asset, we would consider this path going forward. To help you with serial models, let me walk you through how these savings are expected To translate to our P and L during 2023. We began to see these cost savings during the Q1 of 2020 And estimate full year non GAAP 2023 SG and A to be approximately $820,000,000 Beyond 2020, we will be able to lower our annual non GAAP SG and A and R and R expenses to be approximately RMB290,000,000. Given we are in the midst of executing our turnaround strategy, we are not providing formal guidance at this time. In light of this, we are providing more details on our expectations for the year.

Speaker 2

As Dushyant mentioned, We expect our 2nd quarter revenues to decline year over year at a similar rate to what we observed in the first quarter. And while we expect our 3rd and 4th quarter to decline year over year, I would expect to see a slight improvement in the rate of declines each quarter. As our transformation strategy takes hold, we expect to see an increase In year over year local billings by early 2024. So our revenue growth trends might be worse From our local billing spend depending on the trajectory of our other categories and the timing of our transformation strategy. Turning to profitability, we do expect to generate positive adjusted EBITDA for the remainder of the year As we start to realize the benefits of our restructuring actions more meaningful.

Speaker 2

On free cash flow, Our ability to convert positive adjusted EBITDA to positive free cash flow will depend on the timing of our working capital cycle and other cash expenses. As a reminder, our working capital has historically been impacted by seasonality With our Q1 generally experiencing a large negative working capital impact and our Q4 experienced a positive Good morning, Dushyant. Given our current equity market volition, our sum at stake and our operating plan Focus on unlocking both top line growth and expense savings, we believe we can create value for all of our stakeholders as we continue to execute our strategy of transformation. Thank you for your time today. With that, we would like to open the call Up for your questions.

Speaker 2

Operator?

Operator

Thank you. We'll take our first question from Trevor Young with Barclays.

Speaker 3

Great. Thanks. 2, if I may. First one, just any color on North America and international local billings in March and so far into 2Q? I think the data points that we had last print were that January February were trending around 46% of 2019 levels.

Speaker 3

And it looks like full quarter results was a little bit softer than that, but maybe some FX noise in there. So just trying to understand whether trends deteriorated in March And where we are so far in April? And then second question, appreciate the comments and the letter evaluating Strategies to enhance liquidity, investors naturally migrate to that sum up stake and I realize there's no active market for that. But you just help us understand if there's any like restrictions or impediments that would prevent you from monetizing that in the next 3 to 6 months if there were A sufficient bid from some party.

Speaker 4

Okay. So this is Jari. Hi. About the local billings in North America, we had for Q1, dollars 222,000,000 Which was down 14% quarter over quarter and 11% year over year.

Speaker 2

And

Speaker 4

to your second question about balance sheet and Samap and so on, yes, we can imagine potential monetization of certain non core assets, Including our stake in Samap, ownership of gift card or our portfolio of intellectual property. The same way as we are pursuing additional cost actions, seeking additional Financing from both public and private markets.

Speaker 1

Okay. Thank you.

Operator

We'll take our next question from Eric Sheridan with Goldman Sachs.

Speaker 5

Thanks so much for taking the questions. 2 if I could. Just coming back to the 8 Strategic pillars you laid out. I wanted to hone in on number 2 and number 3. So in terms of how you might want to invest And ARC could change the product experience to align it with modern marketplace standards.

Speaker 5

I'd love to go a little deeper there on what you see as some of the key white spaces to attack or areas of investment to possibly pursue. And then the second would be your 3rd pillar. How should we be thinking about Sort of arcing or changing the marketing engine inside the company to align more closely with lower funnel performance channels. How should we think about that in terms of either investments that need to get made or possibly changing some of the user funnel and user conversion Pathways that the marketplace has had over time. Thanks so much.

Speaker 4

Thanks for the question. Regarding the first part raising our product experience to modern marketplace standards, as one of the first initiatives which we Started when I joined the Groupon is that we launched hackathon project, which includes a big part of our Engineering team on which is, let's say, developing several major opportunities to our user experience, which we have on our website. And we are making sure that taking up all processes that we have on this on this news and the plus Objection, then we have Vida right now. And one example of change which we are developing is, for example, the use So generative AI, which we will be using for our self-service for our merchants, but also for our sales team. Right now, the whole process takes several agreements achieved and let's say the quality of deals which are generated through self-service in general So, lower or lower performing compared to deals which are created by agents and using the AI, We are able to based on the website of the merchant and experience from our own data set and the similar campaign and similar category To generate the old food, which will be much higher quality, which means that the whole setup for merchants will be much more simple.

Speaker 4

And yet, like Many more examples in development on checkout page and experience of customers on the website. So this is the first pillar. The second question on marketing engine and tuning up towards the lower funnel performance channel. We are kind of revisiting the setup of all performance marketing channels which we have and we are trying Could there a little bit more of geo focus and a little bit more measurement of performance In a, let's say, small PC, small location, so that we can adjust the spend and spend, Let's say higher spend towards the campaigns and deals which are higher performing versus the

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